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11.481J / 1.284J / ESD.192J Analyzing and Accounting for Regional Economic Growth
Spring 2009
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IMPUTATIONS
NATIONAL INCOME AND PRODUCT ACCOUNTS
Kendrick, John. 1979. “Expanding Imputed Values in the National Income and Product Accounts” The
Review of Income and Wealth. 25 (4): 349-363.
Carol Carson. 1984. "The Underground Economy: An Introduction," Survey of Current Business, 64 (5)
(May): 21-37.
Edgar L. Feige, 1990. “Defining and Estimating Underground and Informal Economies: The New
Institutional Economics Approach World Development,” 18 (7): 989-1000
MIT 11.481J, 1.284J, ESD.192J ANALYZING AND ACCOUNTING FOR REGIONAL ECONOMIC GROWTH
DEFINITIONS
Conceptual framework
“New institutional economics”– relationships
between the “economy” and “institutions”
determine the rules of the game for economic
exchange.
Definition
Underground economy: economic activities that
do not adhere to, or are not protected by, the
“rules of the game”.
BACKGROUND AND ASSUMPTIONS
• Background
– “imputations are made to place a market value on certain
transactions that do not occur or observable in the
market economy…that affect personal income.”
– Capture non-market, non-economic activities in National
Income Product Accounts (NIPA)
– 8.7% GNP in 1929; 7.6% GNP in 1979
• General Assumptions
– Intermediate products to be included in GNP
– Clear delineation between economic and non-economic
activities
– Market price is more appropriate than opportunity price
(cost) in imputation.
A TAXONOMY OF UNDERGROUND ECONOMIES
“Rules of the
game” being
circumvented
Examples
Economic Implications
Measurement
Illegal
Criminal laws
Drug
trafficking
· Reduces transaction costs;
· Hedges against fluctuations
Anecdotal
information
Unreported
Tax laws
Unreported
income
· Budget deficits, greater reliance
on monetary policy;
· Distorts costs for actors in
unreported economy;
· Biased measuring growth rate
Discrepancies;
Currency ratio
Unrecorded
Requirements of
statistical agencies
Housework
Distorts evaluation of economic
indicators and policy changes
Discrepancies;
Currency ratio
Informal
Administrative rules
covering property
rights, contracts,
and licensing.
Informal land
sales,
unlicensed
vendors
All of the above.
Qualitative or
survey methods
SOURCE Amy Deora and Feiya Huang, 2005
MEASUREMENT METHODS
Measurement
Data source
Examples
Strengths
Weaknesses
Anecdotal
Information
Individual
observations
Participant
observations
Analyzing activity that
evades detection
Difficult to analyze
systematically
Micro-level
Survey data
Imputations of
informal sector
Analyzing
characteristics of
underground actors;
Testing hypotheses
about the effects of the
“rules of the game”
Costly;
Biased;
Inconsistent over
time.
Macro-level
National
accounts
Central bank records,
input-output table
Cheaper;
Less biased;
Long-term trends.
Depends upon
assumptions
SOURCE Amy Deora and Feiya Huang, 2005
MACRO-LEVEL IMPUTED METHODS
1. Payment-Transactions
•
Assumes velocity of money is constant.
•
Determines theoretical amount of transactions and compares it to
actual transactions to determine unreported income.
2. Currency Ratio
•
Assumes cash/demand deposits have constant ratio
•
Determines unreported cash and imputes unrecorded/unreported
income
Benefits
•
Better than discrepancy methods because empirical values aren’t
influenced by underground economy.
•
Assumes structure of money supply is constant.
SOURCE Amy Deora and Feiya Huang, 2005
DISCREPANCY METHODS
•
National Accounts Discrepancies:
Good indicator for finding sectors with a large unrecorded economic
activity, but does NOT indicate size of informal sector.
• Tax Discrepancies:
Provides a rough, underestimated measure of unreported income.
• Weaknesses:
May reflect conceptual differences in what you are trying to measure,
not actual discrepancies.
Both measurements often reflect only part of the informal sector.
SOURCE Amy Deora and Feiya Huang, 2005
CENSUS AND SURVEY DATA METHODS
• Defines “Informal workers” too narrowly
• Takes no account of activities that circumvent
institutional constraints or are excluded from institutional
protection.
• Underestimates the number of informal workers.
SOURCE Amy Deora and Feiya Huang, 2005
CURRENT PRACTICES IN IMPUTATION
• Bureau of Economic Analysis
– “imputations are made to place a market
value on certain transactions that do not
occur or [are not] observable in the market
economy… that affect personal income.”
– Six types of imputations are made:
• Payments-in-kind
• Employer-paid health and life-insurance premiums
• Net rental value of owner-occupied farms, and the value
of food and fuel produced and consumed on farms;
• The net rental value of owner-occupied nonfarm housing
• The net margins on owner-built housing
• Interest paid by financial intermediaries expect life
insurance carriers
http://www.bea.gov/regional/definitions/nextpage.cfm?key=Imputation
IMPUTATION ITEMIZATION (1)
Imputations by Sector and Type in Relation to Gross National Product
B. Percentage of GNP
A. Billions of dollars
1929
GNP, official
Additional imputed values
Personal sector, total
Unpaid household work
Volunteer labor
School work
1948
1966
45.7 117.7 349.5
27.1 73.6 180.1
0.6
2.9 15.4
5.1 15.7 60.9
4.5
12.3
10.4
0.3
20.5
0.5
76.5
4.3
5.8
14.7
46.9
0.3
2.2
0.9
6.9
1.8
27.0
Employee
2.6
5.2
11.9
Public
Government sector
0.7
1.6
6.1
3.8
21.0
49.9
Business sector, total
Investments expensed
Tangible
Intangible
Consumption expensed
Imputed rentals
Total imputed values
1929
U H W100.0
=
103.4 259.1 753.0 1,306.3
2.1
Frictional unemployment
Imputed rentals
Household capital
Institutional capital
1973
55.3 152.8 446.3
Figure by MIT OpenCourseWare.
1948
n
1966
1973
(∑
* N i )100.0
* Ch
100.0T i 100.0
i =1
663.4
44.2
45.4household
46.4
50.8work; UHW=Unpaid
318.4
26.2
28.4
23.9
24.4
Ti=Average hour for group i; Ni=Number 0.6
2.0
2.0
of25.8
persons
in1.1group
i; Ch=The
average 148.1
4.9
6.1
8.1
11.3
hourly
labor
compensation
of household 24.1
2.0
1.7
1.6
1.8
employees;
n=number
groups;
10.6
138.5
10.1 of7.9
10.2
8.5
0.3
0.2
0.6
0.7
Critique:
The
average
hours
5.8
75.5
5.5
5.7
6.2
were based on two surveys:
2.3
0.3
0.3
0.2
0.3
one
in
Syracuse,
N.Y.,
1968,
3.5
45.6
2.1
2.7
3.6
and the other in Michigan,
17.4
2.5
2.0
1.6
1.3
1975-1976.
They
may
not be
9.2
0.7
0.6
0.8
0.7
able to represent the national
91.2
3.7
8.1
7.0
condition.
It is6.6difficult
to be
830.1
53.5
59.8
59.3
63.5
included into NIPA because of
lack of accuracy.
IMPUTATION ITEMIZATION (2)
Imputations by Sector and Type in Relation to Gross National Product
B. Percentage of GNP
A. Billions of dollars
1929
GNP, official
Additional imputed values
Personal sector, total
Unpaid household work
Volunteer labor
School work
1948
1966
1973
103.4 259.1 753.0 1,306.3
45.7 117.7 349.5
27.1 73.6 180.1
0.6
2.9 15.4
5.1 15.7 60.9
663.4
318.4
25.8
148.1
1929
1948
1966
1973
VL 100.0
= TT100.0
* C s 100.0
100.0
VL=
Volunteer
labor;
TT= Total hours
44.2
45.4
46.4
50.8
worked;
Average
hourly compensation
26.2
28.4Cs=23.9
= 24.4
1.1
2.0sector.
2.0
in0.6the service
4.9
∑
8.1
11.3
2.1
4.5
12.3
24.1
10.4
0.3
20.5
0.5
76.5
4.3
138.5
8.5
* s School
10.1
7.9
10.2
SW=
work;10.6
Ni= Number of students
0.7
0.3
0.2
0.6
at educational level i; Cl= Average annual
5.8
14.7
46.9
75.5
0.3
2.2
0.9
6.9
1.8
27.0
2.3
45.6
5.8of persons in the same
5.5 compensation
5.7
6.2
labor
age bracket who started working after
0.3
0.3 the 0.2
0.3 of education. n=
attaining
(i-1) level
3.5
2.1
2.7of educational
3.6
number
levels.
Employee
2.6
5.2
11.9
17.4
Public
Government sector
0.7
1.6
6.1
9.2
3.8
21.0
49.9
91.2
55.3 152.8 446.3
830.1
Frictional unemployment
Imputed rentals
Household capital
Institutional capital
Business sector, total
Investments expensed
Tangible
Intangible
i =1
Consumption expensed
Imputed rentals
Total imputed values
S2.0W
6.1 n
=1.7
1.6 * C
1.8
N
i
li
F
= N 1.6
*C
2.5U 2.0
1.3
0.7 Frictional
0.6
0.8unemployment;
0.7
FU=
N= Average
number of frictional unemployment; C=
3.7
8.1compensation
6.6
7.0
Average
of all employees.
53.5
59.8
59.3
63.5
Figure by MIT OpenCourseWare.
CRITIQUE
1. The annual labor compensation for people
of different educational levels cannot fully
represent the value of school work.
2. The average compensation of all employees
is not a good indicator of the opportunity
cost of frictional unemployment.
3. The use of trended estimates are
excessively smooth thus they may impair
the usefulness of the NIPA for tracking
business cycles.
IMPUTATION ITEMIZATION (3)
Imputations by Sector and Type in Relation to Gross National Product
B. Percentage of GNP
A. Billions of dollars
1929
GNP, official
Additional imputed values
Personal sector, total
Unpaid household work
Volunteer labor
School work
1948
1966
103.4 259.1 753.0
45.7 117.7 349.5
27.1 73.6 180.1
0.6
2.9 15.4
5.1 15.7 60.9
2.1
4.5
12.3
10.4
0.3
20.5
0.5
76.5
4.3
5.8
14.7
46.9
0.3
2.2
0.9
6.9
1.8
27.0
Employee
2.6
5.2
11.9
Public
Government sector
0.7
1.6
6.1
3.8
21.0
49.9
Frictional unemployment
Imputed rentals
Household capital
Institutional capital
Business sector, total
Investments expensed
Tangible
Intangible
Consumption expensed
Imputed rentals
Total imputed values
55.3 152.8 446.3
1973
1929 1948
1966
1973
Tangible
investments:
small tools, etc.
1,306.3
100.0 100.0investments:
100.0 100.0
Intangible
financed
Research
and46.4Development,
employee
663.4
44.2
45.4
50.8
318.4
26.2
28.4and
23.9training,
24.4
education
health, safety,
25.8
0.6
1.1
2.0
2.0
and
mobility
costs.
148.1 selected
4.9
6.1
8.1
11.3
24.1
2.0
1.7
1.6
1.8
2.3
0.3
0.3
2.7
0.2
3.6
0.3
3.5
Employee consumption: business travel
10.6
138.5
10.1
7.9
10.2
and
entertainment
expenses.
0.7
8.5
0.3
0.2
0.6
Public
business
5.8
75.5
5.5 consumption:
5.7
6.2
advertising expenses.
45.6
2.1
Rental
values: sum of imputed net
interest
(land,
17.4
2.5 on
2.0 the
1.6property
1.3
9.2
0.7
0.6
0.8
0.7
structures,
equipment
and inventory
stock),
charges for
91.2
3.7 plus
8.1 depreciation
6.6
7.0
830.1 fixed
53.5
59.8
59.3
63.5
the
reproducibles.
Figure by MIT OpenCourseWare.
CRITIQUE
1. Some of the items are intermediate
products (for example: tangible
investments). It is not appropriate to
include these values in the GNP.
2. The inclusion of too many untaxable
items reduces the correlation between
measured income and taxable income,
thus making the National Income and
Product Accounts (NIPA) less useful for
forecasting tax revenues.
IMPUTATION TABLES
Imputations by Sector and Type in Relation to Gross National Product
B. Percentage of GNP
A. Billions of dollars
1929
GNP, official
Additional imputed values
Personal sector, total
Unpaid household work
Volunteer labor
School work
Frictional unemployment
Imputed rentals
Household capital
Institutional capital
Business sector, total
Investments expensed
Tangible
Intangible
Consumption expensed
1948
1966
103.4 259.1 753.0 1,306.3
45.7 117.7 349.5
27.1 73.6 180.1
0.6
2.9 15.4
5.1 15.7 60.9
2.1
4.5
12.3
10.4
0.3
20.5
0.5
76.5
4.3
5.8
14.7
46.9
0.3
2.2
0.9
6.9
1.8
27.0
Employee
2.6
5.2
11.9
Public
Government sector
0.7
1.6
6.1
Imputed rentals
Total imputed values
1973
1929
100.0
663.4
44.2
318.4
26.2
25.8
0.6
Personal sector
148.1
4.9
1948
1966
1973
100.0
100.0
100.0
Imputations in Relation to Official Gross National Income
and Product Estimates, by Sector
45.4
46.4
50.8
1929
1948
1966
28.4
23.9
24.4
A. Billions of current dollars, and ratios as indicated
1.1
2.0
2.0
6.1
8.1
11.3
Gross product, official
24.1
2.0
1.7
Imputations
Adjusted gross product
138.5
10.1
7.9
Ratio to official
8.5
0.3
0.2
Business sector, official
75.5
5.5
Gross product
5.7
Imputations
2.3
0.3
Adjusted0.3
gross product
45.6
2.1
Ratio to official 2.7
Government sector
17.4
2.5 official
2.0
Gross product,
9.2
0.7
Imputations
0.6
21.0
49.9
55.3 152.8 446.3
Figures by MIT OpenCourseWare.
21.1
349.5
370.6
40.4
663.4
703.8
22.0
17.6
17.4
95.4
234.9
651.1
1,107.8
5.8
14.7
46.9
75.5
249.6
698.0
1,183.3
1.8 2.9
10.2
0.6
10.6
16.8
0.7
45.7
48.6
5.8
0.2
3.6
0.3
101.2
3.5 1.06
1.6
1.3 4.3
0.8
Adjusted gross product
3.8
5.6
117.7
123.3
1.6
6.2
Ratio to 3.7
official 8.1
91.2
6.6
Rest-of-the-World,
gross
product
830.1
53.5
59.8
59.3
}
1973
0.7 3.8
8.1
17.4
21.0
38.4
1.07
76.5
49.9
126.4
1.07
149.1
91.2
240.3
2.21
1.65
1.61
63.5 0.8
1.2
4.2
9.0
Total GNP, official
103.4
259.1
753.0
1,306.3
Imputations
Adjusted gross product
55.3
158.7
152.8
411.9
446.3
1,199.3
830.1
2,136.4
Ratio to official
7.0 1.88
1.07
1.535
1.590
1.593
1.635
SIZE OF THE UNDERGROUND ECONOMY
• Estimates (% of GNP):
–
–
–
–
–
–
Japan: 4%-15%
Australia: 3%-13%
Canada: 5%-22%
Sweden: 0%-17%
Germany: 2%-12%
US: 3%-33%
Underground economy/GNP
Japan
Australia
Canada
Sweden
Germany
US
0
10
20
30
40
% of GNP
Source: Carson, 1984. Chart 3. Estimates of the Size
of Underground Economy in Selected Countries.
GROWTH OF U.S. UNDERGROUND ECONOMY
Estimator
Period
Average growth
Gutmann(1977)
1974-1980
20%
Feige (1979)
1976-1978
38-55%
Tanzi (1983)
1974-1980
14%
IRS (1983)
1976-1981
14%
Simon (1982)
1974-1980
10%
Source:
Source:Carson,
Carson,1984.
1984.Table
Table4.4.Estimates
Estimatesofofthe
theUnderground
UndergroundEconomy
Economyininthe
theUnited
UnitedStates
States
MAJOR FINDINGS
• In 1973, adjusted GNP was 63.5% higher than
the official figure.
• Imputation grew at a faster rate than GNP
since 1929.
• If imputation is included, the personal sector
accounted for 1/3 of the national economy,
the largest single share.
• Government final demand is 60% higher if
imputation is included.
• Imputed property income has risen much
faster than monetized property income.
POLICY IMPLICATIONS
Measurement of underground economies plays a vital role
in the development process:
• Improves the information system on which policy makers
rely.
• Redirects policy attention toward the restructuring of
indigenous institutions.
GENERAL CRITIQUE
• Lack of historical context
• Inclusion of intermediate products
• Difficulty of distinguishing economic and noneconomic
activities
• No adjustment for economic distortions
• Unclear deflator definition
• Heavy reliance on assumptions
• Applicability in today’s economy
• Unclear definition of “informal” versus “underground”
economy.
• Overlap between categories of underground economy.
• Categorization is useful for telling us what we can measure
and what we cannot measure, but provides little guidance on
measuring the informal or illegal economies.