REVIEW OF RELATED LITERATURE AND STUDIES

The black market shares are huge business in the whole world wide economy and

it has thousands and numerous good and bad effects on the same. In debt to its illegal

nature, all and different kinds of products are sold in the black market, as there is nobody

to ask how and why. Following are different effects that black market may destroy and

give good results on the economy. Though a lot amount of money is involved in

transactions of the black market throughout the world, the very goal of these off-the-

record transactions is to avoid the various taxes, which otherwise need to be paid to the

governments. In debt to this, every year, the different kinds of governments tend to lose

revenue amounting to millions and billions of dollars, which otherwise would have been

used for the good and benefit of different countries and their citizens. Black markets easily

provide to the people all that they need, either at cheap or higher prices, or all that is hard

to get and/or short of supply and products needed, at higher prices. More often than not,

the products offered by the black markets are smuggled and stolen. When people buy

products under the black market under any of the above-given scenarios, it amounts to

the losses to the different domestic industries and eventually to the government itself, as

it is not possible for the white marketers to sell their products either at cheap or prices,

and/or without authentic legal permits and formalities.

 The black market is illegal in life, and all the transactions that was produced and

happened therein, are illegally off the record. Without any authentic record, it is very

difficult for the government to estimate correctly the actual economic status of the different

country. Consequently, it becomes immensely hard for the government to set out a plan

and implement policies for the different country's economic development. Even the

unemployment data’s of the different countries may have major loopholes, owing to the

presence of the black market economy. Underground markets are a huge part of the

informal economy of the world, and millions and millions of people are employed in these

markets. However, it is not possible for any economic statistics to estimate the right and

exact number of employed people in the different countries, as those employed in the

underground markets, are often marked as unemployed.

Black Market economy arises from as well as leads to corruption and destruction

of lives. Because black markets may lead to immense monetary gains and loss for its

people and players, sometimes, deliberate shortages of certain necessary commodities

and products that are created in the established markets. These products are then sold

in the underground markets, and despite the higher prices, the demand does not diminish.

While on the other hand, underground markets encourage the common and

innocent people to break laws, they also tend to make anything and everything available

into their market easily than the established markets. However, one needs to put it in

mind that more often than not, the quality product of an illegal product purchased from an
underground market and that of a legal product purchased from a normal market, differs

to a great extent.

Pricing of Goods in the Black Market

The pricing of goods and services in black market economy depends on the status

of a particular quality or product in the established market or white market. That is to say

that it depends on the demand and products and the supply trends that a particular

quality/product displays. Thus, the pricing of goods in the underground market can be

essentially done on two levels:

Price Ceiling is an upper limit placed by the government/with a regulatory authority with

government sanction on the price (per unit) of a product.

Price Ceiling is a form of price control. Other forms of price control include minimum

prices and price change ceilings (like rent control). The price ceiling is the maximum price

for a good quality.

 There are two types of price ceilings:

 Non-binding price ceiling: This is a price ceiling that is greater and higher than the

current market price.

Examples:
 Classes in Economics want students to be able to understand and recognize the

difference between binding and non-binding price ceilings. Consider the example of a

price ceiling for apartments in New York. If the equilibrium price is $3,000 per month, and

the government sets a price ceiling of $4,000 per month, is anything going to

happen? The answer is no, because everyone who is willing to pay up to $3,000 gets an

apartment, and everyone who is willing to supply an apartment for $3,000 gets paid. This

is an example of a non-binding (or not effective) price ceiling.

Remember that the price ceiling should be above the equilibrium price so that any

price BELOW the ceiling is attainable. Different way to think about this is to start at a

beginning price of 0, and eventually go up until you hit the price ceiling price or the

equilibrium price. If you hit the price ceiling first, it is binding. However, if you hit the

exact price of equilibrium first, it is not.

 Since our original price ceiling of $4,000 was ineffective, what happens if we drop

the price ceiling to $2,000? This will lessen and lower the ceiling price line on the graph

to anywhere below the price level of equilibrium. You can now see that the equilibrium

price is HIGHER the price ceiling, so it is not possible for the equilibrium price to be

feasible. This means that suppliers are ready to provide a lower quantity than originally

supplied (because of the lower price) and consumers are willing to demand a higher

quantity/product than originally required. This results in a shortage amount because

quantity demanded is higher than quantity supplied. As long as the ceiling price remains,

there will be a shortage in the market, and some consumers that are ready and able to

pay for the good will not be able to get it.

A price floor or minimum price is the minimum limit or lower limit placed by a

government or a regulatory authority.

A price floor is a form of price control. Another form of price control is a price ceiling.

There are two types of price floors:

Non-binding price floor: This is a price floor that is less than the current market

price.

Binding price floor: This is a price floor that is greater than the current market

price.
 Examples:

To completely understand a price floor, try to imagine dropping a rock in your

house. The rock cannot go lower/less than the floor because it will hit it and stop. The

same concept holds with prices and with a price floor. The price cannot go lower/less

than the price floor. Where this gets tricky and hard is that a BINDING price floor occurs

UP the equilibrium price. It may be confusing to have a floor above anything or

something, but if you try to think it through it makes sense. If a rock wants to fall from an

altitude of 60 meters to an altitude of 30 meters, than the floor must be above 30 meters
in order to be greatly effective. If the floor is at 20 meters, the rock (price) can fall to 30

meters with no problem price. It may be confusing to have a floor above something or

anything, but if you try to think it through it makes sense. If a rock wants to fall from an

altitude of 60 meters to an altitude of 30 meters, than the floor must be above 30 meters

in order to be effective. If the floor is at 20 meters, the rock (price) can fall to 30 meters

with no problem.

The classes of economics wants students to be able to acknowledge the difference

between binding and non-binding price floors. Examine the example of a minimum wage

law in California. Imagine the minimum wage is $9.00 per hour. If a company wants to

pay someone $11.00 per hour, than there is no problem because this price is above the

floor. However, if a company wants to pay an employee $7.00 per hour, than the there

is a problem because this amount is below the price floor. The latter example would be

a binding price floor, while the former would not be binding.

 Since our original price floor of $5.00 was ineffective, what happens if we increase

the price floor to $11.00? This will raise the price floor line on the graph above the

equilibrium price level. You can now see that the equilibrium price is BELOW/DOWN the

price floor, so it is not possible for the equilibrium price to be obtained. This means that

suppliers (labor) are willing to provide a higher quantity/product than originally supplied

(because of the higher price) and consumers (firms) are going to demand a lower quantity

than originally demanded. This outcome in a surplus (unemployment) because quantity

supplied is higher than quantity demanded. As long as the price floor is present, there

will be a surplus in the market, and some of the suppliers that are ready and provide their

labor will not be able to find a job (a firm willing and able to hire them at the price floor

price).
 The book-to-market phenomenon (BM) – the positive association between book-

to-market phenomenon and subsequent returns – looms huge among capital market

enigmas. Economic theory states that the distinction between market and book values of

different companies reflects on their future abnormal profits. We capture these abnormal

profits for a larger and better sample of science-based companies by evaluating the value

of the off-balance sheet investment generating those profits – the price of R&D capital –

and show empirically: (i) Firms’ R&D capital is associated with their subsequent stock

comes back. (ii) For R&D intensive firms, this ‘R&D effect’ subsumes the ‘book-to-market

effect.’ (iii) The association between R&D and subsequent returns appears to result from

extra-market risk rather than from stock mispricing. We thus provide an explanation for

the book-to-market phenomenon of R&D companies.

The economic growth about the impact of black market to country’s economy in

this paper, we examine and evaluate the various links among foreign direct investment

(FDI), financial markets, and economic growth for this country. We explore and discover

whether countries with better financial systems can exploit FDI more efficiently. Empirical

analysis, by the use of cross-country data between 1975 and 1995, shows that FDI alone

engages an ambiguous role in contributing to the economic growth. However,

different countries with well-developed financial markets gain significantly from FDI. The
results are solid to different kinds of measures of financial market development, the

inclusion of other determinants of economic growth, and consideration of endogeneity.

This paper shows that stock market liquidity and banking development both capital

accumulation, positively predict growth, capital and productivity improvements when

entered together in regressions, even after managing for economic and political factors.

The results are steady with the views that financial markets provide important services

for growth, and that stock markets provide different kind of services from different banks.

The paper also finds that stock market size, changeable, and international integration are

not robustly linked with growth, and that none of the financial indicators is closely

associated with private saving rates.