What is the Black Economy?

In simple terms, a black economy is a form of business activity and revenue that is not recorded by individuals in order to evade being taxed on the business. It can also be referred to as business dealings which are not computed in a country's gross domestic product (GDP). this type of business is generally not traceable. 

The inability of the business to be traced, makes the business not to be taxed. In this type of business, transactions are cash based only, there are secret account books also known as number two accounts in which all transactions are recorded. This business type is prominent in a majority of third-world countries and many other first-world economies.

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What is the Black Economy Important?

The most common reason why various people engage in the black economy form of business include trading of contraband products, avoid paying taxes on their businesses, avoid obeying government regulations which are related to the kind of business they operate or avoid the effect of price controls and rationing on such businesses. 

When there is any type of ban placed on some specified products, a black market usually emerges from this kind of situation. This ban can either be in the form of making all transactions relating to the specified product to be illegal or by taxing the product so that it becomes too expensive to buy. A black market is then birthed to make available these products at a cheaper rate.

Example of Black Economy

There are many black economies examples ranging from human trafficking to cybercrime, illegal mining, organ trafficking, drug trafficking, counterfeiting, crude oil theft, light weapon trafficking, shielding of legal products from being taxed, etc. 

Looking at an example from evading paying taxes on legal products (goods and services), where work is done under the table i.e., the income earned from such work is not included in the report given to tax authorities. 

Taking an instance of a construction worker whose services rendered was paid for under the table. In a situation where the worker doesn't pay his taxes on the salary he earned, a black market has occurred. Although the work was legal, his no-payment of tax was illegal.

Four Types of Black Economies

The black economy can be divided into four primary types namely:

• The illegal economy: In this economy, revenue is generated through the violation of laws which are applicable to all the scope of commerce.
• The unreported economy: This economy is determined to find a way around and avoid being a part of all fiscal rules which have been laid down in the tax code.
• The unrecorded economy: This economy defies the government rule defining that all forms of businesses must be reported to government statistical agencies.
• The informal economy: The activities in this economy try to bypass any type of cost associated with the business. They are also not included in partaking in the laws and administrative rules governing the sectors.

Related Topics

• Economics
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