GDP and shadow economy Click on Resources – Library – type the title of the article in the Search window and Read the articles. You can also use pdf. files with the articles posted in Content – Week 1 – Articles for Discussion week 1 area. GDP and Shadow Economy GDP and Shadow Economy “More Americans Work in the Shadow Economy” by Zumbrun, Joshua “Cultural Implications for the Shadow Economy” by Buszko, Andrzej Tomasz

GDP and Shadow Economy

A shadow economy refers to economic transactions that are deemed illegal. One of the reasons that render such activities illegal is the failure to comply with government requirements on reporting. Besides, the nature of the said goods and services may be illegal organically. In the US, for instance, the shadow economy comprises activities like street drug selling and prostitution (Zumbrun, 2013). It is difficult to gauge the size of such activities because no government reporting occurs to determine their extent.

Impact of Shadow Economy on GDP

An immediate impact of a high shadow economy is that it depresses GDP (Buszko, 2018). A higher shadow economy means the country collects less in terms of tax. On the other hand, a shrinking shadow economy stimulates GDP growth since revenue agencies can collect more revenue. In turn, governments use the collected revenue to engage in infrastructural development, a factor that stimulates economic growth.

Factors Influencing the Shadow Economy

One of the primary factors influencing the shadow economy is the tax burden. If people feel the government is frustrating them with a high tax, there is an incentive to resort to a shadow economy since there is zero tax (Elgin, 2019).

Another notable factor influencing the shadow economy is the ineffective social welfare system. If one loses a right to a social welfare program in some countries, they must undergo a strict verification process before qualifying. Such bureaucracy makes people resort to working in a shadow economy to avoid potential future restrictions.

 The Challenge of Shadow Economy for Governments

Shadow economies pose serious challenges to all countries worldwide, particularly developing countries. Most or all transactions within the shadow economy are untaxed, thereby presenting fiscal challenges to governments. Also, state power is likely to be impacted negatively if people feel they can undertake economic activities without the government’s interference (Kirchgässner, 2017).

Conclusion

In a nutshell, shadow economies hurt the fiscal position of governments, especially in the developing world. However, I believe a shadow economy is necessary for people’s survival. Were it not for activities like prostitution, sex workers and those who depend on them for livelihood would go to bed hungry.

References

Buszko, A. T. (2018). Cultural Implications for the Shadow Economy. Engineering Economics, 29(1). https://doi.org/10.5755/j01.ee.29.1.18069