According to the European System of Integrated Economic Accounts (ESA 1995), hidden/informal economic activities are included in the production boundaries and, consequently, have to be included in GDP. Production activities to be covered by GDP therefore include activities performed illegally or conducted without the knowledge of taxation, social security, statistics or other authorities. According to an international convention, own-account housework is not included in production in the context of national accounts.
The Federal Statistical Office (FSO) uses various measures to produce GDP figures that are as comprehensive as possible:
• Explicit imputations are made especially in those areas where large-scale censuses are conducted only at long intervals (e.g. the census of crafts, and the census of distributive trade and the hotel and restaurant industry). Special calculations are also made for own-account construction and tips.
• In many cases, implicit coverage of hidden/informal economic activities is ensured by the calculation method itself. For instance, agricultural production is determined on the basis of areas under cultivation and the relevant average yields. Also, rents are calculated through the stock of dwellings – broken down by size and other characteristics – and the relevant rents per square metre. Whether or not the incomes thus calculated and included in the GDP figure are declared for tax purposes is neither known nor considered relevant for an exhaustive coverage of such production activities.
Therefore, the frequently voiced opinion that the GDP does not include hidden/informal economic activities is incorrect as far as Germany is concerned.
2. Sources and estimation methods
2.1 Major steps to ensure GDP exhaustiveness
Obtaining exhaustive results is a major goal of national accounting. Ensuring the exhaustiveness of gross domestic product (GDP) and gross national income (GNI) measures was a major goal of the national accounts revision undertaken in Germany in 1999 when implementing ESA 95. Within the scope of the 2005 major revision of national accounts, the exhaustiveness of the GDP compilation was further improved by integrating the results of the latest large-scale censuses and other multi-annual surveys as well as by refining some special estimates and adjustments. The various measures are summarised below for the production and expenditure approaches.
2.1.1 Comparison of employment data
When implementing ESA 95, a large-scale project was carried out with the goal of checking the exhaustiveness of GNI on the basis of employment data. Extensive comparisons were performed
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between employment data from population statistics and those from surveys for specific industries (where they are included in GDP calculations), in order to identify possible under-coverage. In the 2005 revision process, the compilation of employment data was based on the existing but methodologically improved statistics as well as on new sources like the monthly telephone survey on employment status.
2.1.2 Comparison with turnover tax statistics
To further improve the basis for the calculations, comparisons were made with turnover tax statistics for all areas of the GDP production approach. A problem with this method is that it is not always possible to compare data, due to differences in industry classifications used in the data sources.
2.1.3 Integration of large-scale censuses
Generally, GDP exhaustiveness was improved by integrating the results of various large- scale censuses and other multi-annual surveys at the time of the latest national accounts revision. They included, for instance, the 2001 census of energy and water supply, the 1999, 2000 and 2001 censuses of distributive trade and the hotel and restaurant industry, the microcensus 2002 (which was used for the recalculation of the housing stock) and new results of the time budget survey, the services statistics and the agricultural accounts.
Moreover, GDP exhaustiveness has been improved by implementing new statistics which were developed in the last few years. These are the structural business statistics (SBS) for small enterprises (with 1 to 19 employees), the business register and the statistics on long-term nursing care.
2.1.4 Comparison with household budget surveys
As part of the work undertaken to study the use of household surveys for national accounting, the final consumption expenditure of households was checked for exhaustiveness. To that end, in the 1999 benchmark revision a first detailed comparison was performed between the data from household surveys (sample survey of income and expenditure) and the data obtained from the supply-sector approach (sales to households as derived from economic and taxation statistics). This exercise was repeated during the 2005 major revision. Results from that comparison were used to make adjustments, especially in the area of the distributive trade and the hotel and restaurant industries.
2.1.5 Comparison with investors approach
The product-based estimates of gross fixed capital formation in construction and in machinery and equipment were compared with the results based on investment data from investors, leading to adjustments in some cases. Since in recent years various statistics were either newly introduced or refined (e.g. structural business statistics for small enterprises in industry and construction, and particularly services statistics), most of the data missing in the investors’ approach, which in previous years had to be estimated, are now available from SBS.
2.1.6 Production-turnover comparison
As part of calculating fixed capital formation in machinery and equipment by the commodity flow method, checks are made to determine whether any investment services have to be included in addition to the production covered by production statistics. Such additions are based on a comparison between production and turnover statistics.
2.1.7 Checks and special calculations
In addition to the above mentioned checks for exhaustiveness, separate exhaustiveness studies were performed for many areas of both the production and expenditure approaches, particularly by comparison with specific, and in part non-official, data sources. Calculations included those regarding own-account construction, prostitution, private lessons, tips and income in kind. Also, supplementary estimations are made for data not collected due to cut-off limits. Finally, valuation at purchasers’ prices was done on the basis of computed turnover tax rates.
2.1.8 Input-output integration
Revisions also arose from integrating information obtained from input-output computations of previous years, which generally are not available early enough to be included in current-year GDP calculations. The results of the input-output data for 2000 were incorporated in the 2005 benchmark revision. Corrections affected the output and intermediate consumption.
As a consequence of the exhaustiveness checks, imputations for undercoverage are calculated for various GDP aggregates. Explicit imputations covered various kinds of undercoverage such as own-account construction, tips and remuneration in kind, evasion of taxes and levies and statistical cut-off limits. As all relevant information was not available, a further breakdown by individual causes was not possible.
2.1.9 Separate estimation of hidden/informal economic activities
The Federal Statistical Office does not compile separate estimates of hidden/informal economic activities as part of national accounting for the following reasons:
• The main goal of national accountants is to capture as exhaustively as possible economic activities according to ESA 95 concepts. For GDP exhaustiveness, it is irrelevant whether or not a specific economic activity is legal or illegal or otherwise hidden;
• There is no international definition of the hidden/informal economy. Sometimes this just refers to un-invoiced sales and repairs or own-account construction, and sometimes to illegal criminal activities, i.e. those activities liable to prosecution. In addition, the existence of cut-off limits in statistical surveys reduces the coverage of that part of the economy;
• To the extent that hidden/informal economic activities are covered implicitly by the calculation methods already in place, it would be necessary to remove these from independent estimates to avoid double-counting. However, information on their volume is not available.
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Therefore, the Federal Statistical Office does not intend to publish a separate estimate on the size of the hidden/informal economy. The FSO considers that the issue of separately identifying the non-observed economy is subsumed by the need for overall reliability, objectivity and scientific verifiability in official statistics.
Notwithstanding this general guideline, the FSO is currently working on a feasibility study to investigate whether drug trafficking and production, and smuggling of cigarettes and alcohol can be estimated in a sufficiently reliable way for national accounts purposes.