Types And Causes of Black Economy-Explained

Types And Causes of Black Economy-Explained

Introduction

  • A black economy is also known as an underground economy, hidden economy, illegal economy and shadow economy.
  • In black economy is an economy which involves the illegal transaction or some form of irregular activities against the set of rules.
  • If the rules specify that if the sale of this particular goods and services is prohibited if one goes against the rule and sell the goods and services then it comes under a black economy.
  • The main aim of the black economy is to avoid the tax, skirt price controls, and trade contraband.
  • Goods and services exchanged illegally may be above or below the market price.
  • For e.g. Drugs, weapons, tax evasion, animals and animal's products, biological organs, alcohol, tobacco, copyrighted media, currency, and fuel.

Types of Black economy

There are four types of the black economy which include how each activity differ from one from another. This four different market differs from one to another according to the rules that they violate.
1) The illegal black economy
2) The unreported black economy
3) The unrecorded black economy
4) The informal black economy

1) An illegal black economy

  • An illegal economy includes the income produced by doing those economic activities which violate the legal rules set to regulate the commerce industry. In an illegal market those, who engaged in the production and the distribution of banned goods and services, are called an illegal market participant.
  • For e.g. Drug trafficking, arms trafficking, and prostitution.

2) An Unreported Black Economy

  • An unreported economy includes those economic activities which avoid or evade the fiscal rules established by the institutions like tax code by the tax department.
  • In an unreported economy, the amount of revenue reported is not real or it is not reported but it must be.
  • The unreported economy measures the unreported money by the "tax gap" which is the difference of amount due to the fiscal authority and the amount of tax actually paid.
  • For e.g. Tax evasion, money-laundering, 

3) An unrecorded black economy

  • An unrecorded economy includes those economic activities which avoid the institutional rules and regulations which define the reporting requirements of the government statistical agencies.
  • An unrecorded economy is an amount of unrecorded income which is recorded in national accounting system but in reality, it is not.
  • An unrecorded income problem is mostly seen in the countries which move from one accounting system to another.

4) An informal black economy

  • An informal black economy includes the activities which costs are excluded from the benefits and rights incorporated in the legislation and the admin rules cover property relations, commercial licensing, labour contracts, financial credit and social security systems.
  • The income generated by an economic agent who operates informally, it is called an informal black market.
  • An informal black economy is the part of an economy which is not taxed, controlled by any form of government, or includes in gross domestic product. 
  • The informal sector is defined by unreported employment in the developed nations. it is kept as a secret from the state for the tax purpose labour law purposes but it is legal in all other aspects.

Causes

1) Wars
A black economy mostly flourishes in the wartime because nations engaged in the war or support to any single county keep a ban on essential resources like food, gasoline, fuel, metal etc.

2) Law and regulations
In a nation, laws which are imposed for the good cause but it leads to a black market.
For e.g.: Prohibition of alcohol

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