The Underground Economy and GDP Estimation in Developing Countries

Abstract

The estimation of gross domestic product (GDP) in most developing countries portrays a lot of meaning; most often it is very low. This could be true or false. The existence of underground economy in this economies tend to undermine the estimation of GDP in developing economies, because the size of such economy is large, hence the actual figure if gross domestic product in these countries is hardly a true reflection of the picture. An underground economy is given various names and meaning, depending on the context it is employed. The economy is described as a
market based production of goods and services whether legal or illegal that escapes detection in the official estimate of gross domestic product (GDP).The objective of the study is to show that the size of underground economy is correlated to GDP figure. Using the technique of ANCOVA, the result from the study shows that the coefficients are not positively related, but statistically significant in explaining the variation in the dependent variable. This is showing that the underground economy can contribute significantly to the growth of the economy, therefore policies should be
designed and strengthen to include their activities in the economy.