National Statistics, Republic of China (Taiwan)

Does the underground economy count as GDP? Does the spillover effect count as GDP?

The "illegal economy" refers to economic activity not permitted by law, and includes smuggling, illegal extraction of sand and rock, while the "hidden economy" refers to economic activity not included in income reports or statistical surveys, such as operation of underground factories and tax evasion; these two items are collectively known as the "underground economy." In accordance with the UN's SNA regulations, the output value of productive behavior must be calculated, even if the behavior is not legal or sanctioned by social customs. In particular, when transaction income is possibly used to purchase the output of legitimate economic activity, the transaction source may also derive from legitimate behavior. In light of the system's equilibrium and integrity, the output value of all productive behavior—including the underground economy—must be calculated and included in GDP.


However, in statistical practice, it is difficult to obtain good data concerning most illegal economic activities, such as those involving drugs and sexual services. As a consequence, the world's leading countries (including the United States, France, Canada, Australia, etc.) do not include the underground economy in their estimates, nor does Taiwan. However, because of product flow characteristics (for instance, when the products of underground factories are resold and exported overseas by legitimate downstream firms, the output value of the underground factory will be included in customs' total export value statistics), some underground economic activities can ultimately still be included in GDP.


The "spillover effect" occurs when certain economic activities performed by an establishment may induce changes in another unit's production conditions, income, or assets without the consent of the latter unit. Pollution is a major example of spillover effect. However, because spillover effects may be either positive or negative, estimating their effect may involve difficult and complex techniques. And even when spillover effects are internalized, such as by collecting air pollution control fees, it may still be difficult to assess whether the collected income is sufficient to express the value of the spillover effect. As a consequence, SNA considers spillover effects to be "other flows," and not "transaction" flows, and spillover effects are not included in GDP. In other words, spillover effect are not calculated in the production → income → expenditure accounting process. If some appropriate method can be used to assess the influence of spillover effects on assets, the effect can be recorded in "assets/liabilities reevaluation adjustment accounts" (according to 1968 SNA regulations) or "other changes in assets accounts (according to 1993 SNA and 2008 SNA).