On the Biases in Interpreting Macro Elasticities as Micro Elasticities, and Vice Versa, in an Almost Ideal Demand System

Elasticity values calculated at the macro level are biased as estimates of micro elasticities, and vice versa. We derive convenient expressions for aggregation/disaggregation biases in an Almost Ideal Demand System. Using after-tax data we calculate income distribution parameters for seven countries that span a wide range of distribution patterns. We then use the distribution parameters to evaluate the differences between macro and micro elasticities for alternative demand system parameter configurations.