A family is running an unlicensed lemonade stand on a hot summer day. An enthusiastic teenager downloads and watches the newest Brooklyn 99 episode on a pirated website. Though the underground economy may appear as a far-away concept, in actuality, it’s a common occurrence in each of our lives.
The underground economy, also known as the shadow economy or the informal economy, refers to the economic activities in the hidden/informal economy. It is a clandestine market that consists of illegal economic transactions in which either the products themselves are illegal or the business does not abide by the government’s rules. Some examples of this consist of the black market and the gray market, tax evasion, unreported income, and pirating.
The gray market consists of an unauthorized distributor reselling a legitimate and legal item without the brand or manufacturer’s permission. An example of the gray market would be if you were to buy an iPhone 14 and resell it to a consumer on the street, you’d be illegally distributing and participating in gray market activities since you do not have Apple’s permission to resell it. Whereas the gray market only distributes products illegally, in the black market, both the product and the means of distribution are illegal. Some examples of the black market are prostitution, murder for hire, and counterfeit products. The underground economy also consists of tax evasion, the act of deliberately avoiding paying what they owe to the government, and of unreported income, the act where a taxpayer doesn’t include their income in a tax return (document where income is reported.) Furthermore, pirating is using or reproducing someone’s work (usually patented or has author’s rights/copyrights) and illegally distributing it to make a profit. For example, before a movie plays, a warning about piracy flashes on-screen. If you were to download and sell the movie without the author’s rights, you’d be participating in piracy.
Of course, the underground economy brings about many repercussions to the economy. To begin with, since transactions aren’t being reported, we can only estimate how big the underground economy is. As a result, countries can’t reliably calculate their Growth Domestic Product (GDP). According to Investopedia, the average size of the shadow economy was 31.9% of the global GDP across all countries while only being 8.3% of the GDP in the United States. Furthermore, the underground economy also affects us personally. For example, due to the government not receiving taxes from the underground economy, we have fewer benefits and services and we have to compensate for these losses by paying higher taxes.
While a few dollars made from selling lemonade doesn’t seem to harm the economy, it not only affects the integrity of our economy but also us taxpayers. Its economic activities may be in the hidden sector, but its repercussions are most definitely not hidden and cheat us honest taxpayers of our money. While completely dissolving the underground economy is impossible, we should start by being prudent and taking into consideration the long-term harm to the economy and our personal lives.
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