Estimation of Mexico's informal economy using DMSP nighttime lights data

In many countries of the world governments are unable to accurately track the true magnitude of economic activity due to the large number of transactions upon which taxes are not paid. It is particularly easy to avoid paying taxes on cash transactions and on remittances transferred from outside of the country. In some cases the so called ldquoinformal economyrdquo is believed to be a substantial fraction of a nation's total gross domestic product (GDP). Using DMSP satellite observed nighttime lights we developed a calibration for estimating reported GDP for the 48 contiguous states of the USA, where the informal economy is rated as relatively low. We applied this calibration to estimate the GDP for the states of Mexico and compared these values to officially reported GDP and Gross National Income (GNI) values. We found that most states in Mexico have a surplus in lighting relative to their officially reported GDP. We attribute this surplus in lighting to the informal economy and have made estimates of the magnitude of this unreported component to the true GDP. The results are encouraging and suggest that this technique could be used in other countries where accurate GDP reporting is problematic.