In: Economics
1. What is the underground economy and what is its effect on the economy?
2. Why does crime falls when income rises?
1.
Underground economy refers to those economic activities that are
either illegal in nature or are performed to evade the guidelines
of the regulatory authorities. For example, the trading of drugs in
the economy that is already banned by the government, constitute
the underground economy. On a similar note, the cash transaction to
buy or sell real estate property that is neither reported, nor tax
paid to the concerned authorities, is also considered to be the
part of the underground economy.
The underground economy negatively affects the economy in following
ways:
A. The economic activity of the underground economy is
not included in GDP calculations. So, it undermines the overall
size of the GDP of the economy.
B. It is illegal and increasing the size of underground
economy means more people are getting trapped and susceptible to
penal action of the authorities.
C. It prevents government to get the tax revenue what
the government should get. So it harms the economy.
D. It is a symbol of anarchy and dissatisfaction in the
society, affecting negatively the economy.
E. It reflects the poor control, law and authority in the country, affecting the FDIs in the country.
2.
When income rises, then every needs and wants of the individual are
fulfilled and the person wants to abide by the laws. As a result,
the person wants to be the part of mainstream economy and prevents
himself from the crime. Thus, crime rate comes down.
It is the reason that the government creates programs to improve
income equality and spread its benefits to most of the population
as it curbs the crime rate.