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"The size of the black economy could be as high as €25 billion a year." (Source: Irish Small & Medium Enterprises, Irish Independent, Sept - Leaving Cert Economics - Question 8 - 2016
Question 8
"The size of the black economy could be as high as €25 billion a year." (Source: Irish Small & Medium Enterprises, Irish Independent, Sept. 2015) (a) Explain the te... show full transcript
Worked Solution & Example Answer:"The size of the black economy could be as high as €25 billion a year." (Source: Irish Small & Medium Enterprises, Irish Independent, Sept - Leaving Cert Economics - Question 8 - 2016
Step 1
Explain the term black economy.
Answer
The black economy refers to economic activities that occur outside of government regulation and reporting, meaning they are not included in national income accounts. This typically encompasses transactions that evade taxation, labor laws, and other regulatory measures. Examples include unreported income from self-employment, cash-in-hand jobs, and the underground trade of goods and services.
Step 2
Outline how each of the following is affected by activities in the black economy. Irish government:
Answer
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Taxation: The black economy reduces taxation revenues, such as VAT and income tax, due to unreported earnings. This impedes the government’s ability to fund public services.
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Increased Government Spending: As more individuals rely on social welfare benefits due to underemployment or job instability resulting from the black economy, government spending on welfare programs increases.
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Regulation Costs: Increased criminal activity leads to higher government spending on enforcement and law enforcement agencies to combat economic crime.
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Service Provision: The government may struggle to provide vital services if the tax base shrinks, which can result in deteriorating public services.
Step 3
Outline how each of the following is affected by activities in the black economy. Irish businesses:
Answer
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Sales Decline: Legitimate businesses may experience a reduction in sales as consumers opt to purchase goods and services from the black market where prices are typically lower.
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Workforce Impact: Firms might face difficulties in maintaining a workforce as employees could shift to jobs in the black economy, leading to a loss of skilled labor.
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Pressure on Services: Legitimate businesses may feel compelled to lower prices or improve service quality in order to compete more effectively with unregulated black market offerings.