I don\'t really understand this at all. So can someone explain this to me in sim

Question

I don't really understand this at all. So can someone explain this to me in simple terms?

Creating a High Black Market Premium I was lounging on Negril Beach in Jamaica, recovering from the rigors of a consulting assignment in Kingston, when a local entre- preneur made me an attractive proposition. He offered to trade me Jamaican dollars for American currency at a rate 65 percent more favorable than the official exchange rate I get at the hotel. (Since a transaction was illegal under Jamaican law, I'm not going to tell you whether I accepted his offer.) But why would he make such an offer? he Jamaican government did not allow its citizens to buy Ameri- can dollars except in small amounts for tourist travel. Jamaicans would have liked to hold dollars as a hedge against devaluation of the Jamaican dollar, so there was more demand for U.S. dollars than could be satisfied through official channels at the official exchange rate. The official exchange rate did not price U.S. dollars high enough compared to the value that Jamaicans placed on them-hence, the offer of the local entrepreneur to pay a higher price for my U.S. dollars than the official rate the Jamaican banks were offering. The same phenomenon is common around the world. How does the existence of a black market premium affect the incentives for growth? First, there is obviously a strong incentive to get access to U.S. dollars at the official rate and resell them at the black market rate. This creates fierce competition for licenses to buy U.S. dollars. Anytime the main profit opportunity in the economy is to get around government rules, not much good is going to happen in the real economy.

Explanation / Answer

This paragraph explains the existence of Black Market Premium and its repercussions on the economy. Such black market in currencies exist illegally in foreign exchange in different countries of the world and they operate outside legal banking channels. They arise mostly in economies having weak economic fundamentals and limited foreign exchange reserves so that the citizens have lack of confidence in the value of domestic currency. As a consequence, people in such countries have substantial demand for foreign currencies, as they seek to limit the value of their cash holdings. However, the currency controls by the government make it very difficult for people to buy foreign currencies with their domestic currency at the official exchange rate. A black market, thus, arises for foreign currencies that are normally priced at a significant premium to the official exchange rate, because of its artificial value and imbalance in demand-supply situations.

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