If it's illegal, it doesn't exist

Eurostat plans on harmonizing the way in which all 27 EU member countries calculate their GDP estimates, by requiring all of them to include estimates of contributions from the so-called "shadow economy," i.e. the value of economic transactions that are off the books. This is to include not just transactions that are unregistered but legal (like off the books employment, barter of goods in order to avoid taxes etc.) but also the illegal ones (prostitution, illicit drugs and weapons trade, distribution of fake merchandise etc.)

That's a good idea, but hard to execute. It's a good idea because voluntary economic transactions generate wealth regardless of their legal status, so those activities contribute to GDP whether we like it or not; it doesn't make sense that they wouldn't contribute to our measure of GDP. It's hard to execute for obvious reasons.

I thought some of the reaction of the press and blogosphere to this decision were interesting in that they often revealed profound confusion about measurements and reality and/or about what GDP is supposed to measure. For example, you see headlines like "Prostitution, drugs give a 1.3 billion euro GNP boost" or similar. That's completely ridiculous; sizing up drugs and prostitution boosts the estimate of GDP, not GDP itself. It may seem like semantics but it's not. Whether we account for them or not, drugs and prostitution are part of our economies. If those activities were to suddenly disappear, most countries in the world would suddenly become poorer (some very noticeably so; think Thailand or Vietnam). What the headlines are saying is akin to claiming that your car will go faster if you put a speedometer in it. Then, a lot of bloggers complain that the decision was made so that European governments can "spout propaganda by trying to impress voters with artificially inflated GDP numbers." First, GDP figures won't be artificially inflated. Once again, semi-legal and illegal transactions are part of the economy and any GDP estimate that does not include them is an underestimate. Second, for voters it is reality that matters, not measurements. People care about their standard of living, not about official GDP numbers. If someone is unemployed and desperately poor, they aren't very likely to think "Well, but the government is doing a good job overall because annualized GDP growth was 4% last quarter." Government statistics usually have near zero propaganda effect. Another strange reaction was a complaint that illegal activities are violent and destructive, and therefore how can anyone think they increase wealth (as one blogger put it, "What about all those people killed in drug-related violence, how do they increase GDP?") Well, what about those people? GDP is the market value of all goods and services produced within a country. Nothing less, nothing more. Construction workers sometimes die in job-related accidents. Does this mean that construction industry isn't contributing to GDP?