Using the input-output model to measure the size of the shadow economy (the informal economy)

Abstract

Growing the phenomenon of shadow economy is known as one of many essential problems, which might be found in any economy including developed and growing economies. The problem that faces the planners and policy makers is that it's very hard and difficult to estimate the effect of shadow economy on the official economy (aggregative or micro levels). Accordingly, this paper aims to analyze and evaluate how to calculate the impact of shadow economy on the official economy by using a very popular method called Input- Output Model and the technique of Leontief inverse Matrix. Therefore, a hypothetical example of three and four sectors in the economy is treated and utilized in this paper and the main results shows that when the shadow of service sector is added to the economy the estimation of GDP is noticeably increased. Further, the values of final demand and value added is higher than the values of an official economy Therefore, policy and decision makers particularly in growing economies should consider the phenomenon of shadow economy in their future planning.