Black Economy

DEFINITION of 'Black Economy'

The segment of a country's economic activity that is derived from sources that fall outside of the country's rules and regulations regarding commerce. The activities can be either legal or illegal depending on what goods and/or services are involved.

BREAKING DOWN 'Black Economy'

For instance, a construction worker who is paid under the table will neither have taxes withheld, nor will the employer pay taxes on the his earnings. The construction work is legal; it is the nonpayment of taxes that classifies the event as part of the black economy. The illegal-weapons trade is an example of black-economy activity that is illegal.

Black markets are those goods and services that form the black (or underground) economy. Typically, black markets arise when a government restricts economic activity for particular goods and services, either by making the transaction illegal or by taxing the item so much that it becomes cost-prohibitive. A black market may arise to make illegal goods and services available or to make expensive items available for less money (such as pirated software).