Journal of Business & Economic Policy

ISSN 2375-0766 (Print), 2375-0774 (Online)

Using Ordinary Least Squares to Measure the Impact of the Factors Affecting Underground Economy: A Comparison between Pakistan and Turkey
Asst. Assoc. Prof. Dr. Zeynep Erdinç; Ghania Suhail

Underground economy is a source of concern since it distorts policy framework of a country and weakens its government. This paper sheds light on developing countries that are in dire need of policies that tackle this issue and identifies the reasons as to why these countries have large shadow economies in the first place. Using secondary data from 2000-2013 and applying Ordinary Least Squares (OLS) regression model, the impact of tax revenue, unemployment rate, Index of Economic Freedom, population and GDP growth rates, inflation and internet users on the shadow economies of Pakistan and Turkey in absolute and comparative dimensions is tested. In the first part of the paper, the concept and significance of underground economy are discussed, the second part comprises literature review. The third, fourth and fifth parts of the study use OLS to estimate the impact of aforementioned variables on the size of underground economy. The paper concludes with a comparative analysis and suggests policies which can curtail the size of underground economies in the sample countries.

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