Analysis of Correlations between Economic Growth (Rate of Real GDP) and the Underground Economy

• Author: Silviu Pripoaie, Rodica Pripoaie
• Position: Danubius University of Galati, Economics Department - Danubius University of Galati, Economics Department
• Pages: 581-584

Analysis of Correlations between Economic Growth

(Rate of Real GDP) and the Underground Economy

Pripoaie Silviu1, Pripoaie Rodica2

1Danubius University of Galati, Economics Department

2Danubius University of Galati, Economics Department, rodicapripoaie@univ-danubius.ro

Abstract: Analysis of performance of any economy involves the measurement and correlation of three

basic elements: the rate of economic gr owth, the rate of inflation and unemployment rate. When the r ate

of growt h (rate of real GDP) is high, t he production of goods and services is growing and therefore

increasing the number of jobs, decrease unemployment and raise living standards. If the economy is in

recession phase, increasing fiscal pressure to ensure the necessary budgetary funds triggers complex

economic mechanisms. Rules more strictly is that t hose who are not able to operate in the normal

economy to sli de towards the underground economy, and this not because he wants to tax evasion, but

because they simply can not cope with new regulations. It is widely accepted in economic theory and

practice the idea that reliability scale macroeconomic indicators of a country is affected by size of

underground economy and the various tests made so far on this subject, focusing either on the social

aspect or the economic or moral, or emphasizes the illegal or the edge of legality. This has led to various

studies in this area do not provide comparable data or provide dat a to the contrary. Worldwide were put

in place, however, some calculation methods provided that applied the same country and same period,

the results are rarely consistent, sometimes even in fundamentally different.

Keywords: economic growth, unemployment, inflation, underground economy, fiscal pressure

Analysis of performance of any economy involves the measurement and correlation of three

basic elements: the rate of economic growth, inflation and unemployment. When the rate of

growth (rate of real GDP) is high, the production of goods and services is growing and

therefore increasing the number of jobs, decrease unemployment and raise living standards.

The correlations between these elements has been the subject of various investigations in the

field and the most important studies refer to:

 Relationship: economic growth - inflation - unemployment. The specialists argue that

if the rate of growth of real GNP per capita would remain at 2% per year, then consider that

per capita GDP would double every 35 years and so each generation can hope at life double

than at present. If, however, GNP per capita would increase by 1% per annum will be needed

70 years for doubling the living. Should therefore take into account that small differences in

the rate of economic growth over long periods can lead to large differences between the

lifestyles of different successive generations.

 Relationship: economic growth - unemployment or Okun's Law. This analysis reflects

the relationship between economic’s growth rate and unemployment rate and is known as

"Okun's Law" after the name of Arthur Okun of the Brookings Institution in the U.S..

According to this law "for each of the 2.2 percent real GDP growth, achieved in a year, the

unemployment rate falls by one percent. This is a statistical and does not apply to any

country, but only for U.S. and round the Okun did research. Such a statistical relationship can

be deducted for each country separately, depending on the conditions of stage that through,

and could be used in fundamental policy of strategic economic expansion to reduce

unemployment to a convenient size.

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