Measurement of unobserved economic activity in Canada has proven to be an elusive task. In this chapter, we define the two broad concepts of the unobserved economy, summarize the findings of studies that have dealt with this topic in the Canadian context, and present new estimates of unmeasured gross national product (GNP).

Defining the phenomenon

Although it is agreed that unobserved economic activity is the result of a complex interaction of legal, economic, political, cultural, and other institutional factors that vary from country to country, it is also apparent that there is no uniformly accepted definition of unobserved economic activity. It is therefore important to clarify possible concepts of unobserved economic activity at the outset.

It is useful to decompose total economic activity into money-based and non-monetary transactions (Feige, 1980). Non-monetary activities comprise both market activities (i.e., exchange) and non-market ones whether legal or illegal in nature. Included in this group are in-kind consumption and cooperatively organized exchange of professional services. The fact that this component of economic activity is so difficult to measure has resulted in the convention to exclude most non-monetary transactions from GNP. To the extent that shifts occur from the monetary observed to the non-monetary unobserved sector, the National Income and Product Accounts will present a biased picture of economic growth. Despite the obvious importance and far-reaching implications of nonmonetary economic activity (Kendrick, 1979; Eisner, 1978), this essay will concentrate on the monetary portion of unobserved economic activity.