The Underground Economy, the Demand for Currency Approach and the Analysis of Discrepancies: Some Recent European Experience

Recent estimates of the size of the "underground economy" have used the so-called "demand for currency approach." One of the assumptions made by these studies is that official statistics do not take into account the underground economy when estimating GDP. After setting some definitions, the paper presents a brief critical review of the method and results obtained for the European Union using this approach. It points out that the different concepts of unreported and unrecorded activities are incorrectly considered to be equivalent. The third section, after a review of the method of estimating the underground economy using the discrepancy approach, presents the new results of the authors which give an indication of the amount of the unreported activities already included in official national accounts statistics in the EU. The results of the discrepancy approach disprove the widespread belief that official statistics only include officially recorded transactions and reinforce the critical view on the results obtained with the currency-demand approach.