How to calculate real gdp per person

how to calculate real gdp per person

Friedrich Schneider with Dominik Enste

© 2002 International Monetary Fund

March 2002

The Economic Issues series aims to make available to a broad readership of nonspecialists some of the economic research being produced on topical issues by IMF staff. The series draws mainly from IMF Working Papers, which are technical papers produced by IMF staff members and visiting scholars, as well as from policy-related research papers.

This Economic Issue is based on IMF Working Paper 00/26, "Shadow Economies Around the World: Size, Causes, and Consequences," February 2000. Citations for the studies reviewed are provided in the original paper, which readers can purchase ($10.00) from the IMF Publication Services, or download from www.imf.org . Rachel Weaving prepared the text for this pamphlet. Some of the data, including the sample size, has been updated by Professor Schneider for this pamphlet.

Shadow Economies

A factory worker has a second job driving an unlicensed taxi at night; a plumber fixes a broken water pipe for a client, gets paid in cash but doesn't declare his earnings to the tax collector; a drug dealer brokers a sale with a prospective customer on a street corner. These are all examples of the underground or shadow economy—activities, both legal and illegal, that add up to trillions of dollars a year that take place "off the books," out of the gaze of taxmen and government statisticians.

Although crime and shadow economic activities have long been a fact of life—and

are now increasing around the world—almost all societies try to control their growth, because of the potentially serious consequences:

  • A prospering shadow economy makes official statistics (on unemployment, official labor force, income, consumption) unreliable. Policies and programs that are framed on the basis of unreliable statistics may be inappropriate and self-defeating.
  • The growth of the shadow economy can set off a destructive cycle. Transactions in the shadow economy escape taxation, thus keeping tax revenues lower than they otherwise would be. If the tax base or tax compliance is eroded, governments may respond by raising tax rates—encouraging a further flight into the shadow economy that further worsens the budget constraints on the public sector. (On the other hand, at least two-thirds of the income earned in the shadow economy is immediately spent on the official economy, resulting in a considerable positive stimulus effect on the official economy.)

  • A growing shadow economy may provide strong incentives to attract domestic and foreign workers away from the official economy.
  • What Is the Shadow Economy?

    Also called the underground, informal, or parallel economy, the shadow economy includes not only illegal activities but also unreported income from the production of legal goods and services, either from monetary or barter transactions. Hence, the shadow economy comprises all economic activities that would generally be taxable were they reported to the tax authorities. See Table 1.

    Table 1. Types of Underground Economic Activities

    Source: www.imf.org

    Category: Bank

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