What is meant by the term informal economy What are its char

What is meant by the term “informal economy”? What are its characteristic features? What relation does it have to the “formal” economy, and what challenges has it presented for how we think about the economy?

Solution

The informal economy or under-ground economy or shadow economy or black economy is that part of economy which are neither taxed nor monitored by any form of government. In this economy activities are not included in GNP or GDP. Here activity of informal economy are not recorded and there is no proper control over this economy.

The main characteristics of this economy are - a) There is no such record or data are maintained of any activity under this economy are properly available. b) There is no taxed is imposed of any activity under this economy, c) The activities of this economy are not included in GNP and GDP, d) The activities of this economy co-exist with the formal economy, e) In this economy we have so many activities but we can not interlise this economy.

This economy has a relation with formal economy. In a economy both formal and informal economy exist side by side. The informal evoneco sometimes make it difficult of any policy oriented activities of the economy. It is not out of formal economy rather they belong within the formal economy.

The main challanges faced due to informal economy are that as there is no such proper record of this activity are available it becomes very difficult for policy makers to make any economic decision on this economy. As there is no inclusion of any activity in GNP and that actually does not always give true picture of GNP or GDP of an economy.