Black Market Definition
A black market refers to the economic situation that occurs beyond federal-approved channels or sources. Such transactions are a result of under the table activities that help individuals avoid taxes or control prices.
Breaking Down a Black Market
Black markets are the places that involve the trading of illegal products or substances like drugs, firearms, etc. They can have a negative impact on the economy as they operate as shadow markets that don’t record economic activity and don’t consider payment of taxes. Countries with major regulations over currency have the largest black markets. Most of the times, people avoid black markets because of their corrupt nature. However, there are times when they don’t have any other option except accepting this wicked thing.
There are many shortcomings associated with the black market. Some of them include fraudulent activities, inferior quality or duplicate products, chances of violent activities, etc.
Besides strict currency control policies, black markets can also be found in countries that lack strong economic benchmarks including more inflation and less currency reserves, and have a constant exchange rate where national currency is pegged at an unwanted high rates to the U.S. or other nation’s currency. Therefore, such markets can be easily seen in countries such as Iran and Argentina.
The Necessity of Black Markets
There can be times when there is no other alternative except black markets for producing goods. For instance, if you are spending an amazing vacation with your family in an exquisite location and suddenly, you get short of formula for your newly born. First of all, you will try finding it in nearby stores, but in case, you are unable to find it, you won’t hesitate making a black market purchase for getting that baby formula.
If you pay more than the face value of a ticket for a music event, it will also be considered as a black market transaction. There are many nations where there is limited supply of crucial medicines, and in order to get them, one has to buy them from the black market. Though critics believe that it only increases unethical practices in the market, but being a part of the black market and making transactions to protect somebody’s life can be quite easy for someone.
Reference for “Black Market”
Academics research on “Black Market”
The black market for dollars in Brazil, Dornbusch, R., Dantas, D. V., Pechman, C., de Rezende Rocha, R., & Simōes, D. (1983). The black market for dollars in Brazil. The Quarterly Journal of Economics, 98(1), 25-40. The model of the black market for dollars focuses on the interaction of portfolio decisions relevant to the holding of asset stocks and the determinants of net flows of dollars associated with tourism and smuggling. A partial-equilibrium model of the black market shows that the level of the premium is determined by the official real exchange rate and the official, depreciation-adjusted interest differential, as well as seasonal factors associated with tourism. Expectations of future exchange rate changes, under rational expectations, are shown to affect the current level of the black market premium. The empirical evidence provides ample support for the role of the key determinants of the premium as well as for an important seasonal pattern. The magnitude of the seasonal variation is evidence of the imperfect substitutability between black dollars and cruzeiro assets in portfolios.
The black market exchange rate and demand for money in Iran, Bahmani-Oskooee, M. (1996). The black market exchange rate and demand for money in Iran. Journal of Macroeconomics, 18(1), 171-176. Using the Johansen-Juselius cointegration analysis and exclusion test, this paper demonstrates that in a country where there is a black market for foreign currencies, it is the black market exchange rate and not the official rate that should enter into the formulation of the demand for money. Iranian data over 1959–1990 period are employed to demonstrate this point.
Black market work in the European Community: Peripheral work for peripheral localities?, Williams, C. C., & Windebank, J. (1995). Black market work in the European Community: Peripheral work for peripheral localities?. International Journal of Urban and Regional Research, 19(1), 23-39.
A Note on the Theory of the Black Market, Boulding, K. E. (1947). A Note on the Theory of the Black Market. Canadian Journal of Economics and Political Science/Revue canadienne de economiques et science politique, 13(1), 115-118.
Purchasing power parity and black‐market exchange rates, Culbertson Jr, W. P. (1975). Purchasing power parity and black‐market exchange rates. Economic Inquiry, 13(2), 287-296. This paper develops a theory of black‐market exchange rate determination as a function of the market‐clearing rate, the official rate and changes in official reserve levels. The model is tested for three countries over the period 1952–1971 by using purchasing‐power‐parity calculations as approximations of the equilibrium rate. The results indicate that relative rates of inflation are the dominant forces influencing equilibrium exchange rates.