Podcast
Questions and Answers
In what fundamental way does participation in the informal economy differ between individuals in developed vs. developing countries?
In what fundamental way does participation in the informal economy differ between individuals in developed vs. developing countries?
In developed countries, it's often a choice to supplement income. In developing countries, it's more often a necessity due to lack of formal opportunities.
Why might a firm operating in the formal economy be concerned about understanding the needs met by the informal economy?
Why might a firm operating in the formal economy be concerned about understanding the needs met by the informal economy?
Understanding these needs allows formal firms to potentially expand their market by better serving unmet demand or attracting customers from the informal sector.
Explain how the informal economy can simultaneously present both opportunities and threats to formal sector firms.
Explain how the informal economy can simultaneously present both opportunities and threats to formal sector firms.
Informal firms' avoidance of taxes/regulations can undercut formal firms (threat). Formal firms can also learn from informal firms and attract talented workers (opportunity).
What is a primary characteristic that defines the informal economy, as identified by sociologists Manuel Castells and Alejandro Portes?
What is a primary characteristic that defines the informal economy, as identified by sociologists Manuel Castells and Alejandro Portes?
Describe how governments' actions or inactions can contribute to the growth of the informal economy.
Describe how governments' actions or inactions can contribute to the growth of the informal economy.
Why might attracting talented human capital from the informal sector benefit firms in the formal economy?
Why might attracting talented human capital from the informal sector benefit firms in the formal economy?
What is the key difference in how the outputs of the formal versus informal economies are treated in a country's economic accounting?
What is the key difference in how the outputs of the formal versus informal economies are treated in a country's economic accounting?
In what areas of the world is the informal economy especially prominent? Provide specific regions mentioned in the text.
In what areas of the world is the informal economy especially prominent? Provide specific regions mentioned in the text.
Explain why informal businesses may have a cost advantage when competing against formal economy firms.
Explain why informal businesses may have a cost advantage when competing against formal economy firms.
What is the estimated value of the informal economy in the United States?
What is the estimated value of the informal economy in the United States?
Flashcards
Informal Economy
Informal Economy
Commercial activities outside government observation, taxation, and regulation.
Formal Economy
Formal Economy
Businesses registered, taxed, and monitored by the government.
Choice to work informally
Choice to work informally
Supplementing income with a second job.
Necessity to work informally
Necessity to work informally
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Quality of Informal Employment
Quality of Informal Employment
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Threats from Informal Economy
Threats from Informal Economy
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Opportunities from Informal Economy
Opportunities from Informal Economy
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Talent Acquisition
Talent Acquisition
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Cause of Informal Economy Growth
Cause of Informal Economy Growth
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Government's role
Government's role
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Study Notes
- The informal economy involves commercial activities that occur partly outside a governing body's observation, taxation, and regulation.
- Sociologists Manuel Castells and Alejandro Portes characterize the informal economy as unregulated within a legal and social environment where similar activities are regulated.
- Firms in the informal economy typically are unregistered yet produce and sell legal products, often cheaper due to avoiding government fees and taxes.
- The formal economy includes commercial activities taxed and monitored by a governing body for society's benefit, with outputs included in a country's gross domestic product.
- Informal economy work can supplement income from formal employment, though it is often a necessity due to poor conditions and poverty.
- The informal economy varies in size across countries, accounting for three-quarters of nonagricultural employment in developing countries and high percentages in South Asia and sub-Saharan Africa.
- It is also prominent in developed countries like Finland, Germany, and France, accounting for 18.3%, 16.3%, and 15.3% of total economic activity, respectively.
- In the United States, recent estimates show the informal economy generates $2 trillion annually, double the size of the U.S. informal economy in 2009.
- India's informal economy includes millions of shopkeepers, farmers, construction workers, taxi drivers, street vendors, and more.
- The growth of the informal economy stems from an inability to create enough jobs.
- The formal economy faces threats and opportunities from the informal economy.
- Informal businesses may have a cost advantage due to not paying taxes or regulatory costs.
- Formal-economy firms can meet needs of customers from informal-economy firms and attract talented human capital.
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