EU Nations Add Underground Economies to GDP

August 5, 2014

Even though the U.S. has a gross domestic product (GDP) valued at nearly $17 trillion, that huge figure still doesn’t come close to providing a complete picture of the American economy. Each year billions upon billions of transactions go undocumented, untaxed, and ultimately unrecorded by official GDP statisticians. Whether it’s earning a few bucks by mowing a neighbor’s lawn or by selling drugs, these concealed deals all form what’s known as the underground economy.

Many economists have said that it’s impossible to determine the true value of the underground economy, but that’s not getting in the way of some European nations looking for an easy GDP boost. According to recently implemented EU regulations, the total debt held by a member nation may not exceed 3 percent of its GDP. As a result, the U.K., Italy, and Ireland are adding illicit activities like drug sales, prostitution, and even smuggling to their lists of official goods and services. With inflated GDPs, these countries will be able to take on more debt without facing sanctions from the European community.

Although the EU hasn’t officially commented on this practice, a number of experts have questioned its merit. After all, criminals usually do their best to hide their earnings. Not only does this make it difficult to determine their total income, but it also means that their cash is not being taxed. Such misleading information could potentially make a nation’s GDP less accurate. On the other hand, completely ignoring illegal vices distorts the look of an economy by leaving out a big chunk of its output. Nevertheless, tallying up drug sales isn’t the only way some nations are looking to expand the definition of GDP. The U.K., for instance, is also revamping the way it measures nonprofit groups. This policy is expected to boost GDP more than drug sales and prostitution.

 

Questions:

  1. Should earnings from the underground economy be included in a nation’s GDP?
  1. Is it reasonable to include economic contributions from nonprofit groups in GDP?

 

Source: Josh Zumbrun, “Sex, Drugs and GDP: the Challenge of Measuring the Shadow Economy,” The Wall Street Journal, June 8, 2014. Photo by Images Money.

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