The black market has an estimated unreported income of two trillion dollars and an annual tax gap of four hundred and fifty to five hundred billion dollars in the United States alone. It is a phenomenon that can be observed all over the world, no matter how developed or underdeveloped a country may be. What is the black market? A black market is an underground economy where illegal goods and services are traded. There is controversy about how the black market affects the real economy. The demand and supply in illegal markets is bad for the economy because of loss to legitimate industries, miscalculated national income, lesser government revenue, and a creation of shortages.
When a good becomes illegal, the supply curve shifts to the left because there is a drop in supply. Similarly, a drop in demand means the demand curve will shift to the left. The black market makes things available to people either at cheap prices or things that are difficult to get at higher prices. Most of the products offered by black markets are smuggled and stolen. This means that the supplier doesn’t have to pay for production costs and/or taxes. One example of how the black market creates losses for legitimate industries is counterfeiting and piracy. Counterfeiting allows people to sell exact imitations of clothing, shoes, etc to consumers for the same price or sometimes much higher prices. This in turn creates competition for the legitimate industries. It is estimated that the trade of counterfeit goods is worth more than five percent of world trade. Factors such as advances in technology, increased international trade, emerging markets, and increased share of products that attractive to copy have attributed to this high level.
Being that the black market is an underground economy, it causes a misjudgment of the national income. It is often associated with criminal activities, such as prostitution, illegal drugs, and unreported gambling. It includes any income or sales transactions that are unreported. The underground economy also includes paying people ‘under the table’ for activities performed such as painting a house or repairing a roof. This is illegal because it is unreported to tax authorities. Gross domestic product is calculated using personal spending, business spending, government spending, and net exports. The underground economy can account for one-third of the total economy in developing countries and more than ten percent of the total economy in developed countries. The underground economy impacts the GDP by creating a less-than-accurate figure. This can affect government policies that are partially based on GDP numbers. For example, the Federal Reserve Bank relies on GDP figure to make decisions about monetary policy. If GDP figures are not accurate the Federal Reserve bank could potentially make a bad decision regarding monetary policy that could negatively affect the economy.
In addition, the black market creates less revenue to the government. The reason for this is because the various transactions associated with the black market are off-the-record transactions to avoid the various taxes. As a result, every year various governments lose revenue amounting to millions of dollars. The unreported transactions also contribute to shortages. The black market may lead to monetary gains for its players but could lead to deliberate shortages of necessary commodities. These goods are then sold in the black market, despite elevated prices, demand does not diminish. This leads to high cash profits, which go unnoticed.
In contrast, people like Robert Neuwirth believe that the supply and demand in illegal markets is good for the global economy. In his book, Stealth of Nations: The Global Rise of the Informal Economy, he points out that small, illegal, off-the-books businesses account for trillions of dollars of commerce and employ half of the world’s workers. He also claims that it plays a critical role in entrepreneurialism, innovation, and self-reliance. It has grown during the recession, adding jobs, increasing sales, and improving the lives of millions. The black market is the second largest economy in the world and will continue to grow.
In conclusion, though the supply and demand in the illegal market does some good for the global economy, there is a greater negative affect. The reason for this is, it creates loss to legitimate industries, misjudges to national income, lesser government revenue, and a creation of shortages. One way to eliminate the black market, would be to become a cashless society. Without physical cash monitoring and controlling money is much easier.