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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.

Suggested Citation

  • Frank Denton & Dean Mountain, 2004. "Aggregation effects on price and expenditure elasticities in a quadratic almost ideal demand system," Canadian Journal of Economics, Canadian Economics Association, vol. 37(3), pages 613-628, August.
    • Handle: RePEc:cje:issued:v:37:y:2004:i:3:p:613-628
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    1. Lewbel, Arthur, 1990. "Income distribution movements and aggregate money illusion," Journal of Econometrics, Elsevier, vol. 43(1-2), pages 35-42.
    2. repec:bla:revinw:v:35:y:1989:i:2:p:107-31 is not listed on IDEAS
    3. 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.
    4. Stoker, Thomas M, 1986. "Simple Tests of Distributional Effects on Macroeconomic Equations," Journal of Political Economy, University of Chicago Press, vol. 94(4), pages 763-795, August.
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    6. Stoker, Thomas M, 1993. "Empirical Approaches to the Problem of Aggregation Over Individuals," Journal of Economic Literature, American Economic Association, vol. 31(4), pages 1827-1874, December.
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    10. Lewbel, Arthur, 1991. "The Rank of Demand Systems: Theory and Nonparametric Estimation," Econometrica, Econometric Society, vol. 59(3), pages 711-730, May.
    11. 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 430-443, October.
    12. Deaton, Angus S & Muellbauer, John, 1980. "An Almost Ideal Demand System," American Economic Review, American Economic Association, vol. 70(3), pages 312-326, June.
    13. Mchel O'Higgins & Guenther Schmaus & Geofrey Stephenson, 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 107-131, June.
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    Cited by:

    1. 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.
    2. Bente Halvorsen & Bodil M. Larsen, 2006. "Aggregation with price variation and heterogeneity across consumers," Discussion Papers 489, Statistics Norway, Research Department.
    3. 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.
    4. Diakité, Zakary, 2023. "Estimating Demand for Lamb, Beef, Pork, and Poultry in Canada," MPRA Paper 120115, University Library of Munich, Germany.
    5. repec:aer:wpaper:330 is not listed on IDEAS
    6. Frank T. Denton & Dean C. Mountain & Byron G Spencer, 2006. "Errors of aggregation and errors of specification in a consumer demand model: a theoretical note," Canadian Journal of Economics, Canadian Economics Association, vol. 39(4), pages 1398-1407, November.
    7. Frank T. Denton & Dean C. Mountain, 2016. "Biases in consumer elasticities based on micro and aggregate data: an integrated framework and empirical evaluation," Empirical Economics, Springer, vol. 50(2), pages 531-560, March.
    8. Bente Halvorsen & Bodil M. Larsen, 2013. "How serious is the aggregation problem? An empirical illustration," Applied Economics, Taylor & Francis Journals, vol. 45(26), pages 3786-3794, September.
    9. Baek, Ji Won, 2016. "The effects of the Internet and mobile services on urban household expenditures: The case of South Korea," Telecommunications Policy, Elsevier, vol. 40(1), pages 22-38.
    10. Bente Halvorsen & Bodil M. Larsen, 2008. "The Role of Heterogeneous Demand for Temporal and Structural Aggregation Bias," Discussion Papers 537, Statistics Norway, Research Department.
    11. Zhang, Aihua & Lv, Jia & Kong, Ying, 2017. "The Effects of the Internet and Mobile Services on Urban Household Expenditures," 14th ITS Asia-Pacific Regional Conference, Kyoto 2017: Mapping ICT into Transformation for the Next Information Society 168554, International Telecommunications Society (ITS).
    12. Ingvild Almas, 2012. "International Income Inequality: Measuring PPP Bias by Estimating Engel Curves for Food," American Economic Review, American Economic Association, vol. 102(2), pages 1093-1117, April.
    13. 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.
    14. Frank Denton & Dean Mountain, 2014. "The implications of mean scaling for the calculation of aggregate consumer elasticities," The Journal of Economic Inequality, Springer;Society for the Study of Economic Inequality, vol. 12(3), pages 297-314, September.
    15. Frank Denton & Dean Mountain & Byron Spencer, 2006. "Age, Retirement, and Expenditure Patterns: An Econometric Study of Older Households," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 34(4), pages 421-434, December.
    16. Bente Halvorsen, 2006. "When can micro properties be used to predict aggregate demand?," Discussion Papers 452, Statistics Norway, Research Department.

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    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • D10 - Microeconomics - - Household Behavior - - - General

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