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Aggregation effects on price and expenditure elasticities in a quadratic almost ideal demand system
Author(s) -
Denton Frank T.,
Mountain Dean C.
Publication year - 2004
Publication title -
canadian journal of economics/revue canadienne d'économique
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.773
H-Index - 69
eISSN - 1540-5982
pISSN - 0008-4085
DOI - 10.1111/j.0008-4085.2004.00240.x
Subject(s) - almost ideal demand system , economics , quadratic equation , econometrics , macro , inequality , income elasticity of demand , price elasticity of demand , ideal (ethics) , income distribution , macro level , elasticity (physics) , mathematics , microeconomics , computer science , macroeconomics , physics , mathematical analysis , philosophy , geometry , epistemology , production (economics) , programming language , thermodynamics
. 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.