Income measurement and comparisons

The purpose of this paper is to provide a way for better measuring a country's global income when official statistics fail to account for the existence of a thriving underground, or black economy. Another purpose of this research is to discuss adequate ways to perform international comparisons of income, and income per head, and to correct for depreciation. Besides the general interest of this problem, there are two more specific reasons behind this work. First, the allocation of development funds by international agencies (for example, the structural funds in the European monetary system) are conditioned on this measure. Second, the measurement of unemployment may be totally distorted by failing to account for the hidden economy. This paper has benefitted from comments by the participants at the Forty-Seventh International Atlantic Economic Conference, Vienna, Austria, March 16–23, 1999, and especially Michael Pickhardt. Financial support is acknowledged from the Dirección General de Ciencia y Tecnología, under project SEC 98-1112, and the Junta Castilla y León, under project SA 29/99. Comments by the participants at the 1997 Applied Econometrics Association conference on public deficits are also acknowledged. The authors are solely responsible for any remaining errors.