Shuang Pi Nai

The Size of the Underground Economy: A Review of the Estimates

Stephen Easton
Professor of Economics
Simon Fraser University

With the assistance of
Niels Veldhuis, MA.

January 2001

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TABLE OF CONTENTS

TABLE OF CONTENTS ................................................................................................... 3
THE SIZE OF THE UNDERGROUND ECONOMY: A REVIEW OFTHE
ESTIMATES....................................................................................................................... 6
INTRODUCTION ................................................................................................................ 6

1.0 PART I: DEFINING THE UNDERGROUND ECONOMY ....................................... 7
1.1 FOR WHAT PURPOSE ARE THE ESTIMATESBEING COMPILED? ..................................... 8
1.2 USING THE GDP AS A BENCHMARK ........................................................................... 9
1.2.1 Why measure the GDP? ....................................................................................... 10
1.2.2 Common uses of the GDP.................................................................................... 10
1.2.3 Measuring GDP in Canada ................................................................................... 11
1.2.3.1 Calculation of the GDP based on expenditure .......................................... 11
1.2.3.2 Calculation of the GDP based on income ................................................. 11
1.2.3.3 Calculation of the GDP based on valueadded.......................................... 12
1.2.3.4 Reconciliation ........................................................................................... 12
1.2.3.5 An Accounting Identity............................................................................. 12

2.0 PART II: METHODS BY WHICH THE UNDERGROUND ECONOMY IS
ESTIMATED.................................................................................................................... 14
2.1 METHODS BASED ON STATISTICAL DISCREPANCIES ................................................. 14
2.1.1 National Accounts Discrepancies .......................................................................... 14
2.1.2 Tax Form and National Account Discrepancies ....................................................... 15
2.2 AUDITMETHODS ..................................................................................................... 15
2.3 METHODS BASED ON HOUSEHOLD SURVEYS AND LABOUR MARKET STATISTICS ... 16
2.4 METHODS BASED ON MONETARY AGGREGATES ..................................................... 17
2.4.1 The Quantity Theory of Money and Currency Ratio Models ..................................... 17
2.4.2Currency to Demand-Deposit Ratio ....................................................................... 18
2.4.3 Transactions Ratio .............................................................................................. 19
2.4.4 Demand for Money ............................................................................................. 19
2.4.5 The Transactions Method..................................................................................... 20
2.5 SENSITIVITY ANALYSIS ............................................................................................ 20
2.6 ELECTRICITY CONSUMPTION METHOD .................................................................... 21
2.7 THE ECONOMIC FULL MODELING APPROACH........................................................ 23

3.0 PART III: COUNTRY ESTIMATES OF THE SIZE OF THE UNDERGROUND
ECONOMY ....................................................................................................................... 25
3.1 AUSTRALIA .............................................................................................................. 25
3.1.1 A Summary of Recent Estimates for Australia...