Black economy definition — AccountingTools (2023)

What is a Black Economy?

A black economy is that portion of a country's economy that is undocumented. Individuals prefer to operate within the black economy so that they can avoid making tax payments to the government, or to avoid price controls or rationing. The black economy operates by using cash payments or barter to settle transactions. The transactions occurring within the black economy are not included in a country's gross domestic product (GDP) calculation, since there is no way to measure it.

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The black economy constitutes a large part of the total economy of a country in the developing world, because these nations have a large proportion of low-income citizens who cannot afford to pay taxes. Consequently, the GDP figures for many developing nations are probably severely under-reported.

There also tends to be a thriving black economy when a government imposes excessively high taxes, or when the government restricts certain types of activities, such as the sale of drugs or weapons. A black economy is also present when the government imposes an excessive amount of regulation. Examples of black economy transactions are:

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  • The sale of illegal drugs

  • The provision of unauthorized transportation services

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  • Smuggling heavily-taxed goods over the border for sale within the country

  • Paying cash to a housekeeper

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  • Unauthorized currency conversions

Similar Terms

The black economy is also known as the underground economy or shadow economy.

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