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Aggregation effects on price and expenditure elasticities in a quadratic almost ideal demand system

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  • Frank Denton
  • Dean Mountain

Abstract

While it is well known that demand elasticities calculated at the macro level will in general differ from those calculated at the micro level because of aggregation effects, there remain the questions of how large the effects are and how they vary with the degree of inequality in the income distribution. We explore these questions with models based on a quadratic version of the Almost Ideal Demand System. We investigate the elasticity differences theoretically and then calibrate the models and generate numerical results, using income data for seven countries with widely different distributions. The aggregation effects are found generally to be rather small, even with highly unequal income distributions.

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Bibliographic Info

Article provided by Canadian Economics Association in its journal Canadian Journal of Economics.

Volume (Year): 37 (2004)
Issue (Month): 3 (August)
Pages: 613-628

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Handle: RePEc:cje:issued:v:37:y:2004:i:3:p:613-628

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References

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  1. Blundell, Richard & Pashardes, Panos & Weber, Guglielmo, 1993. "What Do We Learn About Consumer Demand Patterns from Micro Data?," American Economic Review, American Economic Association, vol. 83(3), pages 570-97, June.
  2. Denton, Frank T. & Mountain, Dean C., 2001. "Income distribution and aggregation/disaggregation biases in the measurement of consumer demand elasticities," Economics Letters, Elsevier, vol. 73(1), pages 21-28, October.
  3. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-26, June.
  4. O'Higgins, Michael & Schmaus, Guenther & Stephenson, Geoffrey, 1989. "Income Distribution and Redistribution: A Microdata Analysis for Seven Countries," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 35(2), pages 107-31, June.
  5. Lewbel, Arthur, 1991. "The Rank of Demand Systems: Theory and Nonparametric Estimation," Econometrica, Econometric Society, vol. 59(3), pages 711-30, May.
  6. Stoker, Thomas M, 1986. "Simple Tests of Distributional Effects on Macroeconomic Equations," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 763-95, August.
  7. Stoker, Thomas M, 1993. "Empirical Approaches to the Problem of Aggregation Over Individuals," Journal of Economic Literature, American Economic Association, vol. 31(4), pages 1827-74, December.
  8. Denton, Frank T & Mountain, Dean C & Spencer, Byron G, 1999. "Age, Trend, and Cohort Effects in a Macro Model of Canadian Expenditure Patterns," Journal of Business & Economic Statistics, American Statistical Association, vol. 17(4), pages 430-43, October.
  9. Stoker, Thomas M, 1984. "Completeness, Distribution Restrictions, and the Form of Aggregate Functions," Econometrica, Econometric Society, vol. 52(4), pages 887-907, July.
  10. Lewbel, Arthur, 1992. "Aggregation with Log-Linear Models," Review of Economic Studies, Wiley Blackwell, vol. 59(3), pages 635-42, July.
  11. James Banks & Richard Blundell & Arthur Lewbel, 1997. "Quadratic Engel Curves And Consumer Demand," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 527-539, November.
  12. Lewbel, Arthur, 1990. "Income distribution movements and aggregate money illusion," Journal of Econometrics, Elsevier, vol. 43(1-2), pages 35-42.
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Citations

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Cited by:
  1. Denton, Frank T. & Mountain, Dean C., 2011. "Exploring the effects of aggregation error in the estimation of consumer demand elasticities," Economic Modelling, Elsevier, vol. 28(4), pages 1747-1755, July.
  2. Frank T. Denton & Dean C. Mountain, 2007. "Exploring the Effects of Aggregation Error in the Estimation of Consumer Demand Elasticities," Social and Economic Dimensions of an Aging Population Research Papers 226, McMaster University.
  3. Ingvild Almås, 2010. "International Income Inequality: Measuring PPP Bias by Estimating Engel Curves for Food," CESifo Working Paper Series 3247, CESifo Group Munich.
  4. Bente Halvorsen & Bodil M. Larsen, 2006. "Aggregation with price variation and heterogeneity across consumers," Discussion Papers 489, Research Department of Statistics Norway.
  5. Bente Halvorsen & Bodil M. Larsen, 2008. "The Role of Heterogeneous Demand for Temporal and Structural Aggregation Bias," Discussion Papers 537, Research Department of Statistics Norway.
  6. Frank Denton & Dean Mountain & Byron Spencer, 2006. "Age, Retirement, and Expenditure Patterns: An Econometric Study of Older Households," Atlantic Economic Journal, International Atlantic Economic Society, vol. 34(4), pages 421-434, December.
  7. Frank T. Denton & Dean C. Mountain, 2011. "Aggregation and Other Biases in the Calculation of Consumer Elasticities for Models of Arbitrary Rank," Quantitative Studies in Economics and Population Research Reports 447, McMaster University.
  8. Bente Halvorsen, 2006. "When can micro properties be used to predict aggregate demand?," Discussion Papers 452, Research Department of Statistics Norway.

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