4.3 The hidden economy
The hidden, or underground, economy is difficult to measure; however complete coverage of economic production is important for exhaustive estimates of GDP. Economic activity which isn't directly observed or measured is often also referred to as the non-observed economy, comprising: underground production (for purposes of tax evasion); informal activity (eg, unincorporated household enterprises); household production for own final use; and the production and distribution of illegal goods.
The size of hidden economy in New Zealand has been estimated using currency demand models to average approximately 9% of GDP over the period of 1972 to 1994 (Giles, 1999)[25] and more recently averaging approximately 12% over the period from 1999 to 2006 (Schneider, 2010).
The impact on national saving of the non-observed economy is however, unclear. Illegal activity is not excluded from the production boundary; however these are not currently measured in the New Zealand national accounts. With regard to the trade of illegal goods, given these are not measured on both the income and consumption side, ultimately leading to offsetting effects on national saving. The decline in measured consumption by the consumer is offset by the increase in measured consumption by the producer, and measured production remains the same.
The unrecorded production or maintenance of household durable goods, or small improvements to a home or farm is likely to have a positive impact on national saving. Substantial repairs by tenants or landlords are recorded as gross fixed capital formation, however smaller do-it-yourself type repairs are not recorded. This may increase the value of residential dwellings or farms, or produce durable goods, leading to an associated increase in saving which is not captured in the national accounts. This may be a particularly salient omission in New Zealand, where do-it-yourself activity and informal trade in home improvement are likely to be relatively prevalent. In conclusion, we have not attempted to estimate the impact on the saving rate of the hidden economy; any such attempt would likely be speculative. However we can conclude that measured saving rates are probably understated as a result of the hidden economy.
Notes
- [25]For a critique of the methodology used by Giles see Breusch (2005) and a response by Tedds and Giles (2005).
