Black economy definition
/What is a Black Economy?
A black economy is that portion of a country's economy that is undocumented. Individuals prefer to operate within the black economy so that they can avoid making tax payments to the government, or to avoid price controls or rationing. The black economy operates by using cash payments or barter to settle transactions. The transactions occurring within the black economy are not included in a country's gross domestic product (GDP) calculation, since there is no way to measure it.
The black economy constitutes a large part of the total economy of a country in the developing world, because these nations have a large proportion of low-income citizens who cannot afford to pay taxes. Consequently, the GDP figures for many developing nations are probably severely under-reported.
There also tends to be a thriving black economy when a government imposes excessively high taxes, or when the government restricts certain types of activities, such as the sale of drugs or weapons. A black economy is also present when the government imposes an excessive amount of regulation. Examples of black economy transactions are:
The sale of illegal drugs
The provision of unauthorized transportation services
Smuggling heavily-taxed goods over the border for sale within the country
Paying cash to a housekeeper
Unauthorized currency conversions
Types of Black Economies
There are several types of black economies, including the unrecorded economy and the informal economy. They are described below.
The Unrecorded Economy
The unrecorded economy includes all activities that are not recorded by a government’s statistical agency. These activities may not be recorded through data collection errors or inadequacies, or because the activities in question are actively trying to avoid coming to the attention of the government.
The Informal Economy
The informal economy includes those activities that circumvent the normal business and legal structure of a country. This means that informal activities are not licensed by the government, have little or no legal recourse, and have an extremely difficult time obtaining financing from formal lenders. Informal economies tend to comprise a large part of the total economy in countries where it is difficult to obtain a business license, usually due to bureaucratic difficulties and the need to pay bribes to government employees.
Similar Terms
The black economy is also known as the underground economy or shadow economy.