June 17, 2024 

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REAL-BALANCE EFFECT: A change in aggregate expenditures on real production made by the household, business, government, and foreign sectors that results because a change in the price level alters the purchasing power of money. This is one of three effects underlying the negative slope of the aggregate demand curve associated with a movement along the aggregate demand curve and a change in aggregate expenditures. The other two are interest-rate effect and net-export effect.

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Illegal and unreported market transactions and productive activity that escape the watchful eyes of official record keepers. By most estimates, a substantial amount of productive activity takes place in the underground economy of the United States. Of course, these are only estimates because such activity, by definition, goes unreported. If activity in the underground economy is added to official activity in the "overground" economy, then gross domestic product could be boosted by as much as 25 percent to 50 percent, or more. Inclusion of employment in the underground economy is also likely reduce the official unemployment rate by a few percentage points.
The underground economy consists of two basic types of activities: (1) illegal transactions and (2) cash transactions for otherwise legal production.

Illegal Activities

Illegal activities include such things as gambling, controlled drugs, and prostitution. The market value for the production of these activities escapes the official number crunchers because they are, in fact, illegal. Drug dealers generally DO NOT report annual sales to the Internal Revenue Service, Bureau of Economic Analysis, or any other official government entity. Doing so might improve official estimates of gross domestic product, but it would also tend to send perpetrators of illegal activities to jail.

Make no mistake about the productive value of illegal activities. By any notion of current production, illegal activities DO provide wants-and-needs-satisfying value to consumers. This can be seen with a comparison of illegal activities and their legal counterparts.

  • While gambling is legal in places like Las Vegas and Atlantic City, it is illegal in other locations. All legal consumer-satisfying gambling activity in Las Vegas is included in gross domestic product along with other "entertainment" activities. Any illegal consumer-satisfying gambling activity taking place in places like Shady Valley (especially that by Bart the Bookie) is NOT included in gross domestic product.

  • While some addictive substances, like heroin, cocaine, and marijuana are illegal, other addictive substances like tobacco and alcohol are legal. Both satisfy the wants and needs of their users. The production and subsequent sales of legal tobacco and alcohol are included in gross domestic product. The production and sales of their illegal counterparts, heroin, cocaine, and marijuana, are not.

  • While prostitution is legal in some parts of Nevada, it is illegal almost everywhere else in the country. Where legal, it is included in gross domestic product. Where prostitution is illegal, however, it is NOT included in gross domestic product.

Cash Transactions

Cash, checks, and credit cards are all commonly used to facilitate market transactions and the exchange of production. The great thing, from the view point of the gross domestic product tabulators at the Bureau of Economic Analysis, is that checks and credit cards leave records. Such records assist in the measurement of gross domestic product.

Cash transactions, however, are another story. Cash transactions can be made without leaving records. The seller has the cash, the buyer has the good, and no one else need know. This is why illegal activities are almost always conducted with cash. This is also why folks who do not want records of otherwise legal transactions also like to use cash.

These "off-the-record" cash transactions are favored by people who DO NOT care to report all production, sales, or income to tax authorities. Keeping some income unreported allows these folks to pay less income tax. How about an example to illustrate?

Consider Benny Vukovich, Shady Valley's jack-of-all trades. Benny will do most anything. He will prune trees, install toilets, repair cars, or prepare tax returns. Whatever you need doing, Benny will do it. As a self-employed handy-man, Benny is also responsible for self-reporting his income and paying any required tax on this income. For these reason, Benny is often willing to accept cash for the work he does. Should Benny "forget" to report the $20 Lisa Quirkenstone pays him to wax his kitchen floor, well, who is to know? Of course, such failure to report this income means he pays less income tax. And while waxing kitchen floors is not, in and of itself, illegal, Benny's failure to report this income is, in fact, illegal. But who is to know? There is no record of this transaction.

A wide assortment of businesses, especially those providing intangible services (which leave no physical evidence), succumb to the temptation to accept cash payments that are never reported to government agencies, such as the Internal Revenue Service. A plumber might unclog a drain after hours for an off-the-record cash payment. A hair stylist might clip a few locks over lunch, when the boss is not around, in exchange for a little paper currency that never reaches the cash register. A chiropractor might adjust a spine for a discount, if cash is paid and the patient is not inclined to brag about this good fortune to the Federal authorities.

Such cash transactions are NOT illegal, in and of themselves, but when they go unreported, they become part of the underground economy.


Recommended Citation:

UNDERGROUND ECONOMY, AmosWEB Encyclonomic WEB*pedia,, AmosWEB LLC, 2000-2024. [Accessed: June 17, 2024].

Check Out These Related Terms...

     | final goods | intermediate goods | double counting | in-kind payments | current production | value added |

Or For A Little Background...

     | gross domestic product | gross domestic product, ins and outs | National Income and Product Accounts | exchange | market |

And For Further Study...

     | gross domestic product, welfare | gross domestic product, expenditures | gross domestic product, income | net domestic product | national income | personal income | disposable income | gross national product | real gross domestic product | circular flow | business cycles | Bureau of Economic Analysis | inflation | unemployment |

Related Websites (Will Open in New Window)...

     | Bureau of Economic Analysis |

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