What is 'Black Economy'

The black economy is a 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'

People operate in black economies in order to trade contraband, avoid taxes and regulations, or skirt price controls or rationing. 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 music or software.)

As an example of a black economy, 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 also an example of illegal black-economy activity.

Because tax evasion or participation in a black market activity is illegal, those who engage in such behavior will often attempt to conceal their activities from governments or regulatory authorities. Black economy participants choose to transact their illegal transactions in cash since cash usage does not leave a footprint. Different types of underground activities are distinguished according to the institutional rules that they violate. Typically, such activities are referred to with the definite article as a complement to the official economies, by market for such goods and services, e.g. "the black market in bush meat."

The black economy consists of many decentralized clandestine markets. These underground economies exist everywhere – free market and communist countries alike, both developed or developing. Those engaged in underground economy activities circumvent, escape or are excluded from the institutional system of rules, rights, regulations and enforcement penalties that govern above-board parties engaged in production and exchange.

Four Types of Black Economies

There are four major classifications of black economies: the illegal economy, the unreported economy, the unrecorded economy and the informal economy. The illegal economy consists of the income produced by those economic activities pursued in violation of legal statutes defining the scope of legitimate forms of commerce. The unreported economy seeks to evade the institutionally established fiscal rules as codified in the tax code. The unrecorded economy refers to economic activities that circumvent the institutional rules that define the reporting requirements of government statistical agencies. The informal economy comprises those economic activities that circumvent the costs and are excluded from the benefits and rights incorporated in the laws and administrative rules covering property relationships, commercial licensing, labor contracts, torts, financial credit and social security systems.

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