6/6/2023 0 Comments Characteristics of plutocracyTo the purpose of explaining the meaning of the proposed index, it is worth conveniently rewriting Equation (3) as follows:Īs it is clear from the numerator of Equation (5), the aggregation of consumption of good i across households implicitly gives the same weight to every household. This has originated a wide literature on the plutocratic gap (the difference ) and on its empirical measurement () to this regard, for example, have derived a characterization of the CPI plutocratic gap in terms of dispersion of household’s expenditures and the sample covariance between the variation of budget shares and commodity-specific price indexes. Thus, the value of the aggregate CPI can vary according to the method used. Correspondingly, the aggregate plutocratic index will be given by: Where the superscript P stands now for “plutocratic” and. With the plutocratic method, instead, each household budget share is weighted by the share of total household expenditures on aggregate expenditures X (where ). Thus, in the democratic index, the price of each good is weighted by the average budget share of that good. Where is the commodity-specific price index. Using this weighting structure, the corresponding CPI will be given by: Where the superscript D stands for “democratic”, H is the total number of households and. The commodity-specific weight is therefore given by: The democratic method simply requires to average households’ budget shares. The literature identifies two main weighting structures, which give rise to either the democratic or the plutocratic CPI, and that differ with respect to how they aggregate households’ budget sharesĪcross households (where is household’s h consumption of good i and is household’s h total consumption). Section 4 concludes.Īggregate consumer price indexes (CPI) can be defined as a weighted average of commodity-specific price indexes. Section 3 introduces social weights into the weighting structure and defines the corresponding aggregate price index. Section 2 deals with the definitions of the plutocratic and the democratic index. Unlike the alternative structures, the resulting aggregate price index will react more to the prices of those goods that are consumed mainly by the poor. This aim is achieved by allowing social weights to enter the weighting structure and to let the aggregate price index to depend on the distributional characteristic of the good (see ). This paper proposes an alternative and complementary way to aggregate elementary price indexes, with weights that depend on both the level of consumption and the way in which consumption is distributed across households. the share of each good in total household’s budget-are simply averaged across households in the second case, households’ budget shares are weighted by the share of consumption of every household over aggregate consumption. In the first case, households’ budget shares-i.e. To this purpose, the most common alternatives are democratic and plutocratic weights. In its most general form, an aggregate price index (CPI) can be calculated as a weighted average of commodity-specific price indexes. The proposed index provides a complementary basis for the analysis of the impact of inflation and for the calculation of its social value. It is shown how an aggregate price index can be expressed as a weighted average of commodity-specific prices, with weights that depend on both the aggregate share of consumption and the way in which consumption is distributed across households. To this purpose, recourse is made to the concept of distributional characteristic. This paper introduces social considerations into the calculation of the price index. Keywords: Price Index Distributional Characteristic Social Weight Inflation. Department of Economics, Centre for Research in Economics and Public Finance (CEFIP), University Roma Tre, Rome, ItalyĮmail: Aprevised accepted June 29, 2012
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