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This paper investigates the effects of underground economy on the Iran’s imports demand for intermediate, consumption and capital goods during 1971-2011. In this study, the size of the underground economy of Iran has been estimated by using fuzzy logic and demand for imports has been analyzed within intermediate, capital and consumption goods separately. Our findings show that the average size of the underground economy of Iran is 20.64 % of Gross Domestic product(GDP) for 2001-2011 period, and the effect of the underground economy on the demand for imports of intermediate goods is negative, but underground economy affects positively the demand for imports of capital goods and consumption groups. In addition, import demand for intermediate goods with respect to the underground economy is less elastic and negative-signed, while import demand for capital goods and consumption goods with respect to the underground economy is less elastic and positive-signed.

Keywords: Underground Economy, Fuzzy Logic, Import Demand Function

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