Black Economy – Definition

Cite this article as:"Black Economy – Definition," in The Business Professor, updated April 7, 2020, last accessed August 13, 2020, https://thebusinessprofessor.com/lesson/black-economy-definition/.

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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.

A Little More on What is a Black Economy

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.

Reference for “Black Economy”

https://www.investopedia.com › Insights › Markets & Economy

https://treasury.gov.au/review/black-economy-taskforce/what-is-the-black-economy/

https://www.thebalance.com › Investing › US Economy

www.businessdictionary.com/definition/black-economy.html

https://dictionary.cambridge.org/dictionary/english/black-economy

Academics research on “Black Economy”

An expenditure-based estimate of Britain’s black economy, Pissarides, C. A., & Weber, G. (1989). An expenditure-based estimate of Britain’s black economy. Journal of public economics39(1), 17-32. We estimate the size of Britain’s black economy (defined narrowly as unreported taxable income) by using income and expenditure data drawn from the 1982 Family Expenditure Survey. Our working assumptions are that all income groups report expenditure on food correctly; employees in employment report income correctly; and that the self-employed under- report their income. We estimate food exependiture equations for all groups and then invert them to arrive at the conclusion that on average true self-employment income is 1.55 times as much as reported self-employment income. This implies that the size of the black economy is about 5.5 percent of GDP.

Estimates of the black economy based on consumer demand approaches, Lyssiotou, P., Pashardes, P., & Stengos, T. (2004). Estimates of the black economy based on consumer demand approaches. The Economic Journal114(497), 622-640. We propose a consumer demand system approach to estimating the size of the black economy where alternative hypotheses affecting the empirical results can be tested in a nested framework. This approach allows for the estimation of the under‐reporting of household income from various sources, dispensing with the need to use arbitrary criteria to classify households by their main source of income. It also avoids potential bias in black economy estimates arising from mistaking preference heterogeneity (substitution) as income effects. We illustrate these arguments by estimating the extent to which self‐employment income in the UK is under‐reported using parametric and nonparametric techniques.

National income and the black economy, Matthews, K. (1983). National income and the black economy. Economic Affairs3(4), 261-267. Unemployment turned out to be far less influential in deciding voting patterns in the election than Labour and Alliance leaders had predicted. This may have been because the real volume of unemployment is far less than the official figure. Kent Matthews presents evidence, based on the Liverpool University economic model, that true unemployment may be as little as 1.8 million, with the other 1.4 of registered unemployed hard at work in the black economy. In the world of knowledge, the last thing to be perceived and only with great difficulty is the essetial form.

The politics of the black economy, Thomas, J. J. (1988). The politics of the black economy. Work, Employment and Society2(2), 169-190. On the basis of indirect estimates of the size of the black economy, it has been argued that failure to measure black economic activity in official government statistics has produced a misleading picture of the state of the economy, overestimating both the rate of inflation and the level of unemployment and underestimating the effects of tax rates on the level of tax evasion. These arguments, which suggest that large numbers of those recorded as being wholly unemployed are actually working in the black economy, have strong political implications for tax cuts and attitudes towards welfare and poverty.

Demand for Currency and the Black Economy in the UK, Matthews, K. G. P. (1982). Demand for Currency and the Black Economy in the UK. Journal of Economic Studies9(2), 3-22. The size and growth of the so‐called “black economy” has provided a great deal of discussion in recent years. Typically the discussion has been confined to editorials and articles in leading newspapers, but of late politicians, civil servants and even academics, on both sides of the Atlantic have commented on the rise of the black economy. Despite this volume of comment, very few serious attempts have been made actually to measure the size of this unobserved sector for the UK.

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