Question

Assume that the size of the underground economy increases both absolutely and relatively over time. As a result: 1. the accuracy of GDP will be unaffected through time. 2. real GDP will rise more rapidly than nominal GDP. 3. GDP will tend to increasingly overstate the level of output through time. 4. GDP will tend to increasingly understate the level of output through time.

Answer 1

Answer:

4) GDP will tend to increasingly understate the level of output through time.

Explanation:

The GDP includes all the final and legal goods and services produced within a country during a year, and underground economies usually involve illegal activities. Since the GDP does not include underground activities (e.g. unreported income, illegal drugs, prostitution, gambling, etc.), it will understate the true level of economic activity.

The GDP only includes activities that are subject to taxes, but some economists estimate that the size of the US underground economy is between $2.25 trillion to $2.46 trillion.