The Underground Economy The very nature and purpose of the underground economy m

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The Underground Economy

The very nature and purpose of the underground economy makes its size difficult to estimate. Nonetheless, economists have developed several methods of estimating its impact. "The Underground Economy" (http://www.ncpa.org/pub/ba273) is a brief essay by the National Center for Policy Analysis that reviews two estimation methods.
The International Monetary Fund's essay “Hiding in the Shadows” (http://www.imf.org/external/pubs/ft/issues/issues30/index.htm) describes the size, causes and consequences of underground economies throughout the world. For an assessment of the underground economy in the U.S., see "America's Shadow Economy is Bigger than You Think--and Growing" (http://m.csmonitor.com/Business/2009/1112/americas-shadow-economy-is-bigger-than-you-think-and-growing) at the Christian Science Monitor.
A: In what capacities have you or people you know been part of the underground economy? B: Why is understanding and measuring the underground economy important?

The Underground Economy

The very nature and purpose of the underground economy makes its size difficult to estimate. Nonetheless, economists have developed several methods of estimating its impact. "The Underground Economy" (http://www.ncpa.org/pub/ba273) is a brief essay by the National Center for Policy Analysis that reviews two estimation methods.
The International Monetary Fund's essay “Hiding in the Shadows” (http://www.imf.org/external/pubs/ft/issues/issues30/index.htm) describes the size, causes and consequences of underground economies throughout the world. For an assessment of the underground economy in the U.S., see "America's Shadow Economy is Bigger than You Think--and Growing" (http://m.csmonitor.com/Business/2009/1112/americas-shadow-economy-is-bigger-than-you-think-and-growing) at the Christian Science Monitor.
A: In what capacities have you or people you know been part of the underground economy? B: Why is understanding and measuring the underground economy important?

The Underground Economy

The very nature and purpose of the underground economy makes its size difficult to estimate. Nonetheless, economists have developed several methods of estimating its impact. "The Underground Economy" (http://www.ncpa.org/pub/ba273) is a brief essay by the National Center for Policy Analysis that reviews two estimation methods.
The International Monetary Fund's essay “Hiding in the Shadows” (http://www.imf.org/external/pubs/ft/issues/issues30/index.htm) describes the size, causes and consequences of underground economies throughout the world. For an assessment of the underground economy in the U.S., see "America's Shadow Economy is Bigger than You Think--and Growing" (http://m.csmonitor.com/Business/2009/1112/americas-shadow-economy-is-bigger-than-you-think-and-growing) at the Christian Science Monitor.
A: In what capacities have you or people you know been part of the underground economy? B: Why is understanding and measuring the underground economy important?

Explanation / Answer

In what capacities have you or people you know been part of the underground economy-

Underground economy means the shadow economy.This type of economy refers where individuals and businesses deal in cash or any other method to avoid the tax liability of govt. licensing,regulation etc.

There are some kind of industries where most frequently transactions happen which is not reported in tax account.In our regular life may be some incidents when we leave restaurant- tips are given to the waiter of restaurants,sometimes in hotel boys who carry our laggage tips are given to them,sometimes when we keep nanny to look after our child their payment is also not accounted in income tax of govt.These all kind of transaction is in cash but not recorded in tax-are encountered as underground economy.

B: Why is understanding and measuring the underground economy important-

Informal economy can be measured by 1)Direct Approach and 2) Indirect Approach.

Direct Approach-Different survey,tax audits should be done here and direct questions are asked to each person wheather their income is taxable or non taxable.It ocuure when number of employed people>number of jobs.

Sometime by direct approach we came to know that some people are engaged in illegal job they might fear of being caught by income tax raid.So they follow underground economy to avoid tax.

Indirect Approach-There are different macroeconomic factors which helps to define underground economy-

Discrepancy between the National Expenditure and Income Statistics-

Discrepancy between the National Expenditure and Income Statistics-Income measure and expenditure measure should be equal.But informal sector shows income measure but not expenditure measure and formal sector follows expenditure mesure not income measure.

Discrepancy between Official and Actual Labor Force-

The Transactions Approach-By including individual expenses,revenue and other purchase to get total financial result.

MV = pT, where M is money, V is velocity, p is prices and T is total transactions. The main assumption is that the relationship of the volume of transactions and official gross national product (GNP) is constant over time.5 Using the value of total transactions (pT) as an estimate of nominal GNP, he calculated the informal economy as the difference between nominal GNP and the official GNP.

The Currency Demand Approach-This is most widely used for shadow economy.

The Physical Input (Electricity Consumption) Method-This method is applied in few developing countries like-Brazil,Venezuela.

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