When government agencies calculate economic figures such as the Gross National Product (GNP), they rely on information gathered from legitimate income reports generated by companies, non-profit organizations and individual taxpayers. What these agencies cannot use in their economic forecasts, however, are the estimated billions of dollars in cash circulating through what is known as the "underground economy." The underground economy includes income generated through illegal means, such as prostitution or gambling, as well as legitimate but cash-based activities such as online auctions or bartering services.

The underground economy, also known as the shadow economy, has been in existence as long as its legitimate counterpart. The difference is that the government has any number of methods for tracking the exchange of goods, services and currency in an above-board economy, but very few ways of tracking the activities of an underground economy. Prostitutes, gamblers and others earning illicit incomes are not likely to provide the government with accurate income information on their IRS tax forms, for instance. A cash-based underground economy works best without governmental interference.

Some economists estimate that the underground economy in the United States alone accounts for up to 1 trillion US Dollars (USD) per year in unreported cash holdings. It has also been estimated that up to 80% of all US one hundred dollar bills printed every year end up overseas within weeks of their circulation. The underground economy supports any number of overseas operations, including covert wars, raw drug production and human slavery rings. All of these illegal activities require an abundant amount of untraceable cash, preferably from a strong government with a stable legitimate economy.

This is not to suggest that every aspect of the underground economy revolves around criminal activity, however. There are also a number of legitimate occupations which largely work on a cash basis, and not all of that income is necessarily reported to the government. Many states have laws requiring residents to pay sales taxes on products bought online, but few have the means to enforce them. Trade and bartering, whether in online auction websites or through classified ads, is also a form of underground economy. Transactions are almost always conducted in cash, and the exchanges are rarely reported as income.

The underground economy should not be confused with the black market, which deals strictly with illicit or illegal activities. A number of activities in the underground economy do fall into a gray area legally or morally speaking, but many cash-based businesses are considered legitimate, or at least work under the tacit approval of the government itself. Black market activities are almost always under the control of organized crime or corrupt governments.

Estimating the actual extent of the underground economy can be a very tricky proposition. Essentially, the government observes financial changes in the legitimate economy, especially when it comes to the flow of hard currency. Assuming that most citizens' spending habits don't change much from year to year, any sudden increases or decreases in the amount of currency circulating in the legitimate economy are most likely the direct result of movements in the underground economy. If a gambling operation suddenly ships 10,000 US one hundred dollar bills overseas, for example, the effects of that loss would be felt in both the legitimate and underground economy.