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I was doing a lot of research into organized crime in East Asia for a project as a favor to an author-friend of mine, and I noticed that there were noted economists and journalists who, in conjunction, estimate the value of black market operations worldwide.

What is the methodology for this? How do these numbers come together? Are these numbers captured in traditional market models?

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    $\begingroup$ I posted an answer related to the informal (underground) economy. "Black market" can be used to describe such an economy, or it can imply that the market is for trade which, if reported, would be illegal (as opposed to trade which is only illegal because it is not reported/taxed). Could you clarify which definition you intended? $\endgroup$ – Jason B Oct 17 '11 at 20:21
  • $\begingroup$ I was referring to black markets as they related to organized crime. Could you refresh my memory: how do the two differ insofar as incentives are concerned? $\endgroup$ – Aarthi Oct 17 '11 at 20:40
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    $\begingroup$ Sorry, I'm guilty of not carefully reading the question (you specifically mentioned "organized crime"). The two concepts are very different, and I'm not sure how you tease out organized crime from the general un-reported market. I think Turukawa's answer does a good job of describing the differences, I'll delete mine as it isn't directly relevant. $\endgroup$ – Jason B Oct 17 '11 at 21:21
  • $\begingroup$ I've taken the liberty to tag the question with the measurement and macroeconomics. Feel free to add to the list or change them Aarthi if you feel they are inappropriate. Perhaps we should consider just an economics tag. $\endgroup$ – Andy W May 2 '12 at 20:24
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They're not usually captured in traditional market models and some of the ways of estimating shadow markets can be a bit esoteric.

First, definitions:

  • informal markets, or shadow markets, are those which fall outside of formal financial systems; these are not necessarily illegal, but cater to sub-economic or very poor communities; however, it can also be local community markets or exchanges - the principle is that these are legal activities which would normally be reported for tax purposes but which are (for whatever reason) not;
  • black markets, or illegal markets, are more normally associated with illicit market activity (drugs, stolen merchandise, etc.);

The UN World Drug Report (2011) lists a variety of illicit drugs and estimates the value based on tillage (aerial surveylance of agricultural areas), production, and various prices sampled throughout the supply-chain by law-enforcement services. It's a reasonable approach, given the difficulties.

In many ways, this type of estimation is similar to the way in which Population Censuses are conducted in many emerging markets and informal settlements. Aerial photographs are used to calculate population density and economic activity. Sampling can estimate product range, constituency and pricing. Supply-chains can be tracked and all of this can be used to estimate a total market size.

And many of these systems come from Wildlife Management.

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  • $\begingroup$ I should have commented earlier -- I love that this answer is succinct and complete. :D Thank you! $\endgroup$ – Aarthi Nov 16 '11 at 19:31
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There are many possible ways to estimate the size of the illegal sector. One particular clever way, I think, is to see how much energy a country uses compared to its official output. If this number is higher than you would expect, you might believe that other, illegal outputs are being created.

To measure drug use, researchers have measured concentrations of the drugs in sewage water.

See Schneider and Estne, "Shadow Economies: Size, Causes, and Consequences" from the Journal of Economic Literature for a listing of various methods and a summary IMF document here.

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