5.3: Missing Output

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Page ID: 287937

Martin Medeiros
Chabot College

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Question: Does the $22 trillion worth of output represent all economic activity in the U.S.? No, it does not.

GDP does not include ‘non-market’ activities such as work that you do for yourself, or work done by someone like a homemaker. When a homemaker cleans a home, there is no doubt that a vital service is being performed. But since the work is not for pay, it is not counted as part of GDP. However, if a paid housekeeper performs the exact same work, then the service is logged into the GDP accounts.

What about the underground economy? The underground economy consists of any sort of economic activity not reported to the IRS, Department of Commerce, or anyone else.

Work done ‘under the table’ is a typical form of economic activity that GDP misses. Illegal activities (e.g., prostitution, some types of gambling, etc.) are also under GDP’s radar. See figure 1.

Chart 1, Chart element

Figure 1: Size of the Shadow Economy, in % of GDP, average over 1999-2018

Source: Shadow Economies Around the World: What Did We Learn Over the Last 20 Years?, Leandro Medina and Friedrich Schneider.

Criminal and other unmeasured economic activity averaged 31.7% of Mexico’s GDP from 1999-2018, a bigger slice of national output than any other OECD country, according to estimates by Friedrich Schneider of the University of Linz. The underground economy ranges from illegal markets such as prostitution to the unreported income of self-employed workers. The U.S. has the smallest underground economy, equal to only 8.3% of GDP. Such activities are, of course, hard to measure, so comparisons of the same country over time may be more useful. The underground economy’s share of national output grew in every OECD country from 1989 to 1999. Rising tax and social security burdens, in addition to increased government regulations, seem to give market participants an incentive to hide their activities from the government.

So, if the point behind going through the trouble of totaling GDP is to account for economic activity, then it seems that some activity is missing.

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