Question

1. What does the term ‘shadow economy’ mean? 2. How does the shadow economy affect GDP in different countries? 3. What are the main factors influencing the shadow economy? 4. Why is the shadow economy a challenge for the governments?

Answer 1

The term shadow economy means that the to all work activity and business transaction that occur below the radar economic activity that is undeclared and for which taxes that should be paid or not.It is also known as the informal sector ,the black economy ,the underground economy or the gray economy.It inclue legal or illegal (criminal) activities such as in legal activities include legal jobs ,gardening,construction work,selling products to car drivers at  traffic lights.Illegal activities is drug dealing and smuggling like that.In different countries  shadow economy affect GDP where the shadow economy is large in prop[ortion to total GDP ,government revenue is low.This means that either public service are poor ,or those n the formal economy are taxed at a higher rate.The problem is that gigh taxation rate encourage people to stay below the radar.

The main factors influencing the shadow economy is that the evasion of direct or indirect tax.In the case of shadow economy the individual marginal tax is obtained by calculating the overall marginal tax burden from indirect and direct taxes including social security contributions.The expected costs of non- comliances derive from deterrence enacted by the state.Another factor is that is tax and social security contribution burdens, intensity of regions, public sector service, other public institutions, tax marale etc,.

Shadow economy is a challenge of government because in shadow economy there are existing substitutional effect as a  result the unemplyment  is created.On the onehand it has been argued that illicit empolyment is partially responsible for such problems as increasing unemployment in the official sector,growing public debt and national pension defecit..

An incresing the size of shadow economy leads to a significant decrease in tax revenue. It usually leads to decreasing government spending and transfers it leads to recission.

Shadow economy decrease  government income which leads to less capacity to provide public goods with high quality. Thus decrease quality of life.

It affect decission making  by government.