You can put away your whip and handcuffs, but leave the boots on, if you don't mind.
The answer is that models ignore output and production activities that are unmeasured because they are underground. At least in the U.S. There are some attempts to measure the illegal sector, but I've never seen an empirical exercise regarding the economy as a whole or some unrelated issue where this was incorporated into the calculations.
May be different for some European and other countries, where the 'black' economy is suspected to be much larger (i.e., Italy).
I would expect that drug money finds its way into the flow of funds information, but to the best of my knowledge the FoF data do not play a large role, if any, in measuring GDP and its components. To find out more, you'll have to bother Dougie on that one.
mbs
MARTIN SCHILLER SAID:
Anyway, I enjoy interrupting your discussion of bad to see if I can get you instead to help find an ecomomist to comment on how they deal with the underground or unreported global economy in their scholarship.
It just seems that huge money transfers have to be reported through a legal entity of a legal sector of economic activity. And that would throw *everything* off.