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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 th... 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 term black economy refers to economic activities that occur outside the official economy, and hence are not recorded in national income accounts. This includes transactions that are not reported to tax authorities, such as cash-in-hand jobs and unregistered businesses. Activities in the black economy bypass regulations and taxes, resulting in a significant loss of potential revenue for the government.
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 the tax base by decreasing government revenues from VAT or income taxes. This forces the government to adjust its fiscal policies to make up for these losses.
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Increased government spending: As individuals may rely more on social services due to financial constraints arising from the black economy, the government might need to increase spending on law enforcement to combat illegal activities.
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Social Welfare Impact: There’s a double effect; while people might seek more social welfare, at the same time many are engaged in the black economy thereby earning income without contributing to social funds.
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Reduction in public service funding: Government might face budget constraints due to lower income, affecting the provision of 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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Reduction in sales: Legitimate businesses often struggle as consumers may switch their purchases to cheaper alternatives available in the black market, directly impacting their revenues.
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Reduction in workforce: Companies might have to lay off staff or freeze hiring due to increased competition from unregulated entities, leading to a decline in overall employment.
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Pressure to reduce prices: Businesses may feel compelled to lower their prices or improve the quality of their offerings in order to compete with those operating in the black market.