What is the Underground Economy?

Answer:
When determining the state of the official economy,

government officials use figures that are reported by companies, businesses, individuals, and organizations when they pay their income taxes. However, the underground economy involves other figures – those that are not a part of the “official” economy. The underground economy includes both income that is illegally earned, such as drug sales, prostitution, and illegal workers; as well as income that is legal but unreported such as tips and other cash-based earnings.

Also called the shadow economy, the underground economy does not earn tax revenue for the government, nor is it easily tracked. In fact, part of the argument for legalizing both prostitution and illegal drugs is that the United States would be able to make some tax revenue off of both activities.

Bartering and other forms of trade are also part of the underground economy. Because such activities are not reported as income, but instead are just traded for other goods or services, they are not usually taxed or reported. The underground economy is not the same as the black market, as the underground economy includes legal activities and businesses, while the black market does not.