1. In your own words, please add a value comment to below discussion:

1. What does the term 'shadow economy' mean?

A shadow economy is the term used to describe any transaction that is made outside of the government's knowledge and outside of the tax regulation. This includes things such as drug transactions and other organized crime, but also includes home businesses that are unlicensed. A child that is running a lemonade stand is technically considered part of the shadow economy, just how an underground drug trafficker is also part of it.

2. How does the shadow economy affect GDP in different countries?

In developed countries the shadow economy only accounts for around 10-20% of the GDP. In developing countries the percentage can be much higher, and on very rare occasion could account for the entire GDP. The shadow economy could help contribute a massive amount to a countries GDP based on how advanced their economy is.

3. What are the main factors influencing the shadow economy?

The main factors that affect a shadow economy are things like employment, minimum wage, and the health of an economy. It is shown that during an economic crash in the United States, the shadow economy grows to a much larger percentage of the country's GDP. In a developing country there may not be as many government regulated jobs, so people may take to working outside of the government's grasp. This is the same when employment opportunities go down in a developed country and people begin to get laid off.

4. Why is the shadow economy a challenge for the governments?

A large shadow economy makes it difficult for the government to get accurate economic statistics such as income and unemployment, this may lead to misguided government policies. Another challenge created by a growing economy is the loss of tax revenue as people drop their government regulated jobs. This leads to a negative cycle of the government either cutting spending on safety nets, or increasing the taxes already in place. This will lead to even more people leaving their jobs, and an even bigger loss of tax revenue.

2. In your own words, please add a value comment to below discussion:

1. What does the term 'shadow economy' mean?

Though there appear to be multiple definitions of what makes up a "shadow economy," in layman's terms it is an unregulated/unreported market economy. This means that all financial transactions for products and services that occur between buyer and seller within this market are done 'under the table' and therefore not reported or taxed.

2. How does the shadow economy affect GDP in different countries?

For starters, since a shadow economy is unmeasured, untaxed income, it causes the GDP in every country to be understated. According to Buszko (2018), this understatement can be as little as 10% in developed countries or more than half the size of an underdeveloped country's GDP (p. 47). In addition to causing an understatement of GDP, the tangible effect is a government loses out on revenue it would have ordinarily received from taxation (e.g., corporate income taxes, indirect business taxes, etc.). In turn, the country's government may not have enough resources to spend on bettering infrastructure and other services it would normally be responsible for providing to its citizens (Prentice, 2010, para. 3).

3. What are the main factors influencing the shadow economy?

Many factors influence the ebbs and flows of a shadow economy, but these factors do not hold the same weight in each country. For example, national culture can either positively or negatively influence a shadow economy. In countries such as Finland and Sweden, where ethical standards and following laws are held in high regard, the shadow economy is smaller. Conversely, in countries like Ukraine and Hungary where the culture is looser, there tends to be more deviant behavior, which is an underlying factor of a shadow economy (Buszko, 2018, p. 48). In addition to national culture, the revolving theme in many of the articles is the rise in taxes can contribute to the increase of a shadow economy. The more money taken away through taxation can drive people to find ways to skirt the system to avoid this.

4. Why is the shadow economy a challenge for the governments?

The shadow economy is a challenge for governments for two primary reasons. First, as discussed above, the government does not get to tax any revenue generated from it because it is done off the record. The trickle-down effect from this means less money for the government to spend at all three levels (federal, state, and local). As a result, safety and public services (amongst other things) could suffer, which could potentially lower the quality of life for some (or many).

Second, the shadow economy is a challenge for governments because they lack the power to eliminate it. This is primarily because governments have a macroeconomy view and power, but the shadow economy is created through microeconomy. Sure, governments do have certain mechanisms (e.g., monetary and fiscal policies) that can reverberate at the micro level, but it will not impact everyone equally due to the scarcity of resources. This is why it is noted in "The Macroeconomic Perspective" (n.d.), that it is not uncommon for macro-level results to be different when summing the microeconomic parts (para. 3).

Putting aside organized crime and other illegal activities, there is an understanding that when times get tough even upstanding citizens will make decisions at the micro level that will contribute to the expansion of the shadow economy. An example of this is well documented in an article written by Zumbrun (2013), where a 61-year-old grandmother started selling items from her basement once she was laid off in an attempt to try and prevent her home from being foreclosed (para. 1). Survival is a natural instinct and at times will cause people to do what they have to do to survive. No law or regulation is going to trump.