Estimating illegal activity as part of the GDP

[BobT]

In a NY Times story on December 8 about smuggling in Lithuania, an economist from that country estimated that 18 percent of the GDP of Lithuania comes from the black market?

How would someone come up with that figure? Is it determined by just figuring out what's not accounted for when you total up the GDP?

[hawthorne]

It's tricky. Lots of unsatisfactory approaches:

Interviews
Discrepancies in official statistics (household expenditure/ income) v reported taxable income
Guesses from the demand for currency
Guesses from the demand for electricity

See here.(PDF)

[BobT]

According to the paper cited, 18% makes a country relatively crime-free.

[hawthorne]

Ah, but you've got to be a bit careful, because people use different definitions of what they count as informal and they come up with differnt estimates. The estimate for Lithuania in the paper I cited is 30.3% of GNP. This is pretty much average for a Transition economy. Indeed, it's fairly average for a non-OECD country.