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Chapter 3

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This chapter will discourse the method which related to this survey. This chapter will lucubrate the measuring used to mensurate the belowground economic system. There are several methods to place the belowground economic system. In this survey, the MIMIC attack will be elaborated to mensurate the belowground economic system.

3.2Model Specification

MIMIC attack is the most suited attack to mensurate the size of the belowground economic system. This is because MIMIC theoretical accounts are efficient to gauge the belowground economic system or revenue enhancement spread in many states. The belowground economic system can non be straight observed. So, the belowground economy’s magnitude should be identified. The proven showed that its size can merely be estimated. In this state of affairs, a really complex attack is chosen and which known as structural equation or MIMIC theoretical account. Generally, structural equation theoretical account requires grounds of statistical relationships that occur between a latent variable ( unseen ) and several ascertained variables. The MIMIC attack allows several index variables and several causal variables in organizing structural relationships to explicate a latent variable, in our instance, the size of the belowground economic system. This method physique by Zellner ( 1970 ) and Goldberger ( 1972 ) which from the psychometries scientific discipline. They applied this theoretical account in the economic sciences as a latent variable theoretical account.The first application of the theoretical account in order to gauge the belowground economic system belongs to Frey and Weck- Hannemann ( 1984 ) , which have processed 17 developed states informations. The thought was established by Aigner, Schneider and Ghosh ( 1988 ) . They improved the method by seting it in order to capture the kineticss of the investigated phenomenon ( DYMIMIC ) and applied it to U.S. informations. Giles ( 1999, 2002 ) developed the method based on a complex clip series econometric analysis and estimated the concealed economic system in New Zealand and Canada. Some other of import surveies were published by Bajada and Schneider ( 2005 ) for Australia other Pacific states, dell’Anno and Schneider ( 2003 ) for the Italian economic system, Schneider ( 2005, 2007 and 2010 ) for states groups and others.

The MIMIC attack is interesting in economic field. The thought is to stand for the end product of the belowground economic system as a latent variable or index, which has causes and effects that are discernible but which can non itself be straight measured. Therefore there are two sorts of ascertained variables in the theoretical account, “causal” variables and “indicator” variables, which are connected by a individual unseen index. Valuess of the index over clip are inferred from informations on causes and indexs by gauging the statistical theoretical account and foretelling the index. The fitted index is so interpreted as a time-series estimation of the magnitude of the belowground economic system. Normally the step is hidden end product or income as a per centum of recorded GDP, although some research workers are concerned with the “tax gap” between existent gross and the possible gross when all nonexempt income is reported

The MIMIC Model ( Multiple Indexs Multiple Causes ) divided into two theoretical account which are the structural theoretical account and the measurings theoretical account.

3.3The structural equation theoretical account

MIMIC is a structural and an econometric theoretical account that treats the belowground economic system size as a latent unseen variable that links a aggregation of discernible indexs – reflecting alterations in belowground economic system size – with causal observed variables -considered to be the drive forces behind belowground economic system activities. Given appropriate informations and indexs, estimations can be achieved by standard econometric processs.



Time development of

Underground economic system

( Latent Variable )

Figure 1: MIMIC Model by Schneider ( 2005 )

Normally, MIMIC divide into two phases which are making links between the unseen variables ( or latent ) and ascertained indexs and composing structural equation theoretical account stipulating the causal relationships between unnoticed variables. In this instance, one variable is unseen ( or latent ) , the size of the belowground economic system. It is indirectly observed through some indexs that capture the structural dependance of the belowground economic system by utilizing variables which predict its size and structural alterations.

MIMIC consists of two types of equations which is a structural one and a measurement equation. The equation which links the latent variable ( ? ) and causes ( Xq ) is named structural theoretical account. The equation uncovering the connexion between indexs ( Yp ) and latent variable is known as mensurating theoretical account. Therefore, the belowground economic system ( ? ) is additive determined by exogenic causes ( x1, x2… , xp ) and the likeliness of mistakes ( ? ) it has to be added to:

……? ( 1 )

Latent variable is capable of some mistakes ( ? ) generated by discernible endogenous indexs

( Y ) :


( 2 )

… … … … … … ..

Y P = ? P ? + ?

x’ = ( x1, x2, … , xq ) – discernible exogenic causes

’ = ( ?1, ?2, … , ?q ) – structural parametric quantities ( structural theoretical account ) ;

y’ = ( y1, y2, … , yp ) – discernible endogenous indexs

’ = ( ?1, ?2, … , ?p ) – structural parametric quantities ( measurement theoretical account ) ;

’ = ( ?1, ?2, … , ?p ) – measuring mistakes

’ = ( ?1, ?2, … , ?p ) – standard divergence.

Equations ( 1 ) and ( 2 ) could be written as:

? ( 3 )

( 4 )


Suppose that E ( ??’ ) = 0 and specifying E ( ?2 ) = ?2 and E ( ??’ ) = ?2, where ? is the matrix ? diagonal, the theoretical account can be reduced to a map of discernible variables:

Y = ? (? ) + ? = ? x + V ( 5 )

Matrix coefficients and the vector of mistakes are:

= ? ?’ and 5 = ? ? + ? ( 6 )

The obtained covariance matrix is:

= E ( v v’ ) =? ?’ +( 7 )

The yesteryear research worker has some of import equations but non adequate status to do the theoretical account easy to acknowledge. Then another research worker introduced the “t-rule” which assumes that the figure of no excess elements from discernible variables covariance matrix must be greater or equal to the figure of unknown theoretical account parametric quantities, assumed by covariance matrix. A sufficient status is at least two indexs and one cause, which allows making a graduated table for ? . In order to repair a latent variable graduated table, parametric quantity ? is required to be set as an exogenic sum. However, the most of import unfavorable judgment of this theoretical account is the dependance of the scalar coefficient ? election. Criticism is chiefly due to troubles in finding the exact sum of structural parametric quantities. There is an of import literature sing the possible causes and indexs of belowground economic system. The economic procedure nature allows following distinguishable classs. The first class is causes which divided into direct and indirect revenue enhancement ( current and forecasted ) . In add-on, revenue enhancement addition is a really powerful motive to prosecute in resistance sector work. The ordinance strength besides encourages people to affect in the belowground activity. Less figure of Torahs, their incompatibility and contradictory commissariats facilitate the transportation of activities and occupations in the belowground sector. The citizens attitude towards province and revenue enhancement morality rules besides consequence the engagement in belowground economic system. Second class is indexs which besides act as pecuniary indexs. An addition of belowground sector activities generates an extra addition of pecuniary minutess. Labour market indexs will mensurate the increasing labour engagement in the belowground sector activities is reflected by a decrease of labour engagement rate in the formal economic system. In end product indexs, belowground economic system growing involves inputs transportation ( particularly labour ) from official to unofficial sector, with negative effects on the formal economic growing rate.

These variables choice could be considered ad-hoc. GDP growing rate is one of the international theoretical account indexs because it is considered that any alteration in the belowground economic system size is reflected by the existent GDP growing rate. Real income per capita is an index that does non include deformations which occur in the pecuniary sums rating, while the portion of personal outgos on goods and services in disposable income is most pertinent in uncovering a behavioral index presuming that informal income will non be saved, but spent. Generally, causal variables are selected harmonizing to each state economic system characteristics, their statistical importance and specificity. Here, in Mimic attack the past research worker besides utilizing GDP as one of the appraisal in MIMIC theoretical accounts.

3.4Causal variable in MIMIC Models

GDP ( Gross Domestic Product ) as a benchmark to mensurate the Underground Economy.

In most of the surveies that are evaluated, the gross domestic merchandise ( or the gross national merchandise which is really similar in most instances is used as a criterion of the size of the belowground economic system. The gross domestic merchandise measured the market value of all finals goods and services that produced in the economic system during a certain period.

When the greater the size of belowground economic system, smaller the size of gross domestic merchandise in the official economic system.

The expression for GDP shown as follow:

GDP = C ++ G +

C = ingestion Outgos

I = Investing

G = Government Purchase

= Net Exports

There are three ways to mensurate GDP which are through studies of outgos, through income and by mensurating the value added.

3.4.1Measuring the GDP based on outgo

The expenditure-based attack is based on the study informations about entire sums of persons passing on concluding goods and services. It elaborated elaborate information about trade good degree disbursement. Although people are ready to state what they buy, they must be less willing to state about their personal income. As a consequence the outgos informations provides extended disbursement which some of disbursement is closely related to the flow of income provides an independent estimation of income. Even some outgos points may be non be reported, but overall types of disbursement may demo some bounds on what is non recorded officially.

3.4.2Measuring the GDP based on income

The income-based attack list all the incomes from all beginnings like rewards, wages, net incomes and others. It excludes transportation payments since these are non categorise as current productive activity. The GDP is the value of concluding goods and service produced in the current twelvemonth, to number transfer income would be to doubt count and the income attack mensurating the value of GDP through amounts of income used to produced goods and services during the twelvemonth. Because income is taxed and comparatively regular, estimations of income flows are relatively easy obtained with well- understood belongingss.

3.4.3Measuring the GDP based on value added

At each phase of production, the value-added attack takes the value of production and subtracts from it the value of inputs. This is a technique that uses the input-output tabular arraies for the economic system and is good suited for depicting the economic system on a sector-by-sector footing. The value of the GDP is the amount of the value added for each good at every phase of production.

The expression as shown below:

Income = Wages + Salaries + Profits + Payments to other Productive Factors

Outgo = Consumption + Investment + Government Spending +

( Exports-Imports )

When aliens spend on our goods and services and we spend on foreign goods and services, the value of exports less the value of imports is the net outgo that is added to the domestic economic system which finds its manner into domestic rewards and wages on the other side of the individuality. Properly stated the both sides of the equation equal the GDP that shows the value of concluding goods and services produced in the economic system during the twelvemonth. The GDP and its effects are the most of import benchmarks for understanding the literature associated with the belowground economic system.

Formula for mensurating belowground economic system based on GDP as causal variable in MIMICS theoretical account


This chapter has discussed the methodological analysiss used in this survey. These methods are of import to place the size of belowground economic system within a state. Although the effects of belowground economic system could be minor, but it has serious deduction on the developing states like Malaysia. The best method should be used to gauge the belowground economy’s activities and the best declaration should be taken by authorities to cut down the belowground economic system activities

In this chapter, the usage of MIMIC theoretical accounts is chosen to gauge the belowground economic system activity. The old survey shown that this theoretical account had be utilizing by three research worker which are Giles and Tedds ( 2002 ) , Bajada and Schneider ( 2005 ) and Dell’Anno and Schneider ( 2003 ) . They found that MIMIC theoretical accounts as the best model in mensurating the belowground economic system. MIMIC theoretical accounts is relay to coincident equations theoretical account of the econometrics text edition or the factor analysis of its psychometric beginnings. The intervention of unit roots and differencing that makes this a dynamic MIMIC theoretical account is besides mistaken.

The past literature has using this MIMIC theoretical accounts to gauge the belowground economic system be affected by established Procrustean inclinations. Many sliding and grading of the consequence act as benchmarking even this operation does non officially documented.

The informations are usually alaborated in ways that are non merely undeclared but have the unfortunate consequence of doing the consequences of the survey sensitive to the units in which the variables are measured. The complexness of the appraisal process, together with its deficient certification, leave the reader unaware of how the consequences have been stretched or shortened to suit the bed of anterior belief. No other attack would hold revealed so clearly what is done to the informations to obtain their estimations of belowground incomes. There are many other consequences in circulation for assorted states, for which the informations can non be identified and which are given no more certification than “own computations by the MIMIC method” . The following research worker should set their rating in MIMIC Models in order to do this theoretical account reliable for the hereafter.

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