A practical log-linear aggregation method with examples: heterogeneous income growth in the USA

A practical aggregation method for heterogeneous log-linear functions is presented. Inequality measures are employed in the construction of a simple but exact aggregate representation of an economy. Three macroeconomic applications are discussed: the aggregation of the Lucas supply function, the time-inconsistent behaviour of an egalitarian social planner facing heterogeneous discount rates, and the case of a simple heterogeneous growth model. In the latter application, aggregate CPS data is used to show that the slowdown that followed the first oil shock is worse than usually thought, and that the 'new economy' growth resurgence is not as strong as it appears. <QD> <P>The reaction of one man could be forecast by no known mathematics; the reaction of a billion is something else again.-Foundation and Empire, Isaac Asimov (1952)</QD> Copyright © 2003 John Wiley & Sons, Ltd.