I have seen many in this forum mentioning about the shadow economy without actually knowing what it actually consists of. Yes its true, it is out of tax net, that's because, either they are earned illegally (eg. Taliban extorting money, or opium trade forms a part of this shadow economy) or the tax authorities find it uneconomical to track them like the chaiwalas, puncture repair shops or maid servants, or small marginal marginal farmers. The higher the proportion of this shadow economy in the the total GDP, the more backward the country is. So there is nothing to be proud of the stated 40% shadow economy of Pakistan.
And yes, you don't just simply add those 40% to your GDP numbers to come at a new imaginary GDP figure. The GDP figure of any country already includes the figures representing the Shadow economy.
To understand the concept, think of a country X, which has only one factory producing 1000$ in revenue. The factory pays 100$ as wages to its only worker who pay 10$ to his maid servant. Now, what should be the GDP of X? 1000, 1100 or 1110? The worker and the maid servant may be part of the shadow economy, but the GDP figure of X would remain 1000$ irrespective of the fact all pay taxes or not.
