Black Market

Economic Implications

There are several economic factors that may prompt the emergence of a black market economy, including an increase in taxes, high unemployment, illegal immigration, lack of strong unions, or a government embargo. An embargo is imposed when a country outlaws sale of a product within its national borders, such as the U.S. embargo of Cuban cigars. The black market can affect the economy in a variety of ways. First, if a product or income is untaxed, the brunt of the taxes will fall on those who legally report their transactions. Second, the cost of the goods offered on the black market is usually higher since the demand is high or the supply may be scarce. For example, the price for banned substances is substantially higher for goods such as fireworks, which may not be legally sold in several U.S. states. The same is true for exotic animals, which may only be purchased by professionals in [Page 180]limited venues, such as zoos. However, the prices may be lower if they have circumvented normal, more costly channels. If stolen goods are offered for sale on the black market, then law-abiding business owners lose out to the dishonest ones. Third, black market transactions affect the measurement of economic growth. Estimates of the extent of black market economic activity range from 9% of the gross domestic product (GDP) in the United States to 76% in Nigeria. GDP refers to the total market value of the final goods and services sold within a given country in 1 year.

One method to estimate the extent of the black market is to compare the amount of personal income declared on tax returns with the amount of money that is actually spent. Two other methods include measuring the changes in currency supply and gauging the velocity of money (how many times money circulates in a given period).

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