>That's Dr. Wanker to you, madamoiselle.
>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).
Italy revised up its official GDP numbers sometime in the late 1980s to account for estimates of the black economy, a revision that finally allowed Italy's GDP to surpass Britain's. Italians called it Il Sorpasso, I think.
>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.
GDP accounts measure just income from production and production itself (defined basically as sales). The flow of funds measures financial flows and levels in two separate sets of accounts. Flows include new saving out of income (profits and personal saving) and expenditures on investments (not just corporate - they consider the purchase of consumer durables an investment), which is where they link with the GDP stats. But then they go off into the pure financial circulation - flows in & out of markets and capital gains. The bull market increased the levels of financial assets far beyond new savings. If you look at pension funds over the long term, most of the increase in their value comes from capital gains and reinvested dividends; new flows in have been surprisingly small. Changes in asset prices like that have nothing to do with the GDP accounts. No doubt lots of laundered money enters the FoF accounts as money from the "rest of world" sector, as they say.