Fundamental Queries in Aggregation Theory

Author(s): Yuji Ijiri

Reviewed work(s):
Source: Journal of the American Statistical Association, Vol. 66, No. 336 (Dec., 1971), pp. 766-
782
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FundamentalQueries in AggregationTheory
YUJIIJIRI*
Aggregation invariousareas ofeconomics,
articles statistics,
and accounting are
surveyed to developa common bodyof fundamental querieswhich underlie these
Theconditions
articles. betweena microsystem
fortotalconsistency and a macro-
system thathave been developedforvarioussystems are investigated and are
relatedtotheconsistency conditions systems.
forgeneralrelational Thisis followed
byan analysisof othertypesof queriescommonly observedin theaggregation
errorsand biases,evaluation
e.g.,partialconsistency,
literature, and selection of
aggregation Finally,
functions. an assessmentismadeofthesignificance ofaggre-
gationtheory inscientific
investigations.
1. INTRODUCTION
The object of a studyin aggregationtheoryis an aggre-
gationstructure whichconsistsof a microsystem, a macro-
system and an aggregationfunction. An aggregation
functionrelatesthe elementsin the microsystem to those
in the macrosystem.
Empirical phenomena representedby an aggregation
structureare numerous.Even withinthe economic,sta-
tisticand accountingfieldstheyincludeproductionfunc-
tions, utility functions,input-output analyses, index
numbertheory,dynamiclinearsystems,information the-
ory,statisticalaggregates,accountingvaluations,income
determination,etc. In fact,it is almost inconceivableto
create any system which cannot be expanded into an
aggregationstructureby aggregatingor disaggregating
the variables in the system.
Because of the varietyof the empiricalproblemsdis-
cussed in aggregationtheory,it is difficultto systematize
various aggregationissues that have been raised in the
literatureaccordingto subject matterunless the nature
ofthe subject is considerablylimited,such as the produc-
tion function,the input-outputanalysis, etc.' On the
other hand, it appears to be not only feasiblebut also
quite usefulto systematizethe aggregationissues froma
methodological viewpoint.Especially, it seems to be in-
terestingto classifythe literatureon aggregationaccord-
ing to the queries that are raised. Such an approach will
enable us to understandthe fundamentalpropertiesof
aggregationstructureand in addition will enable us to
deal with a specificstructuresystematically.
Aggregationliteratureis surveyedin this article from
* Yuji Ijiri is professorofindustrialadministration,
GraduateSchoolofIndustrial
Administration, Carnegie-MellonUniversity,Pittsburgh,Pa. 15213. The authoris
indebtedto Dr. David Rosenblattforhelpfulcommentson an earlierdraftof this
manuscriptand also to Mr. HiroyukiItami forhelp in collectingthe bibliographi-
cal data.
I See [44] and [351forsurveysofsomeareas in economicsand statisticsin which
aggregationissues are raised. Green [44] primarilydeals withproblemsexpressed
in non-linearfunctions:tndFisher [35] withthoseexpressedin linearfunctionswith
quadraticloss functions.
766
? Journalof the AmericanStatisticalAssociation
December 1971,Volume 66, Number336
InvitedPapers Section
such a methodologicalviewpoint. In particular,funda-
mental queries raised in the aggregationliteratureare
classifiedinto (1) total consistency,(2) partial consist-
ency, (3) errorsand biases, and (4) evaluation and selec-
tion,and are discussedin the next foursections.
Total consistencyis the mostbasic issue in aggregation
theory. Suppose that an aggregationstructureis such
that ifa relationholds fora set of elementsin the micro-
system,then a correspondingrelation holds for a cor-
respondingset of elementsin the macrosystem,and ifthe
formerdoes not hold,thenthe latterdoes not hold either.
(Here, the correspondenceis specifiedby the aggregation
function.)Suppose further thatthisis trueforall elements
and all relationsin the microsystem. Then the aggregation
structureis said to be totallyconsistent.Thereforeif an
aggregationstructureis totally consistent,the behavior
of the microsystemcan be completelyidentifiedfromthe
behaviorof the macrosystem.
Conditionsfortotal consistencyhave been exploredfor
manydifferent typesofaggregationstructures.In Section
2, they are surveyedand arrangedin the order of gen-
eralityof the mathematicalstructure(namely,relational
systems,functions,differentiable functions,linear func-
tions, and input-outputmodels). It is then shown how
the conditionsfortotal consistencyforthese systemsare
derivedfromthose forthe mostgeneralcase of relational
systems.
Partial consistencyrequiresless restrictiveconditions
on the aggregationstructurethan total consistency.In
Section 3 threetypesof partial consistencyare analyzed,
namely (1) constrainedconsistency,where independent
variables are constrainedto values whichsatisfycertain
conditions(e.g., equilibriumconditions),(2) filteredcon-
sistency, where dependent variables are transformed
furtherby a filtering function(e.g., a decisionfunction),
and (3) characteristicconsistency,where it is studied
whetheror not certain characteristics(other than rela-
tional identifiability)in the microsystemare carriedto
the macrosystemunder a given aggregationfunction.
Instead of searchingforconsistencyconditionsthat an
aggregationstructuremust statisfy,some writerstake
aggregationstructuresas they are and analyze aggrega-
tion errorsand biases involved in the structure.This
approach is discussedin Section 4.
Such aggregationerrorsand biases are used as a means
ofevaluatingor selectingaggregationfunctionsforcertain
purposes..Section5 surveysliteratureon criteriaofevalu-
Fundamental
QueriesinAggregation
Theory
tion and methods of selectingbetter aggregationfunc- A consistent (or perfect) aggregation may then be
tions. definedanalogously,namelyan aggregationfunctionA is
Finally,in Section 6 some criticalviewpointson aggre- consistentif and only if
gation are surveyed.It is concludedthat the significance
of aggregationtheorylies in helpingothertheoriesevolve Pi(al, a2,
by providingbridgesamong them. forall (al, a2, *, am) in Pi and forall i ? I.
2. TOTALCONSISTENCY
2.1 RelationalSystems
The theoryof measurementconcernsthe relationship
between two relationalsystems,an empiricalrelational
system and a numerical relational system.2Similarly,
aggregationtheoryalso concernsthe relationshipbetween
two relationalsystems,a micro-relationalsystemand a
macro-relationalsystem. However, the relationshipbe-
tween the two relationalsystemsis different in aggrega-
tion theoryas compared with measurementtheory.Let
us brieflystudy the latterfirst.
A relationP oforderm definedon a set A is a subset of
the product set Am=AXAX - - * XA, A appearingm
times.A relationalsystemconsistsof a non-emptyset A
of elementsand a non-emptyset of relations Pi, iCI,
definedon A, namely (A, (Pi)iEi). A measurementfunc-
tion, or simply a measurement,a is a functionwhich
connects a relational system (A, (Pi)i(EI) with another
relationalsystem(B, (Qj)jej) by mappingA intoB and I
into J.3 The characteristicfunction of a relation PF
is a functionsuch that Pi(ai, a2, * * *, am) = 1 if
(a,, a2, * * , am) is in Pi and 0 if not. A measurement
functiona is said to be totally consistentor, simply,
consistent(or perfect)if and only if
Pi(ai, a2, * * *, am) = Qa(i)(a(al), a (a2), * * *, a(am)) (2.1)
forall (a,, a2, * * *, am) in Pi and forall iCI. If a measure-
mentfunctionis consistent,thenwhether(a,, a2 * , am)
satisfiesa relation Pi can be solely determinedfrom
whether (a(ai), a(a2), a (a.)) satisfies the corre-
spondingrelationQa(i).
Note that forthis to be true, P, and Qa(i) must be of
the same order for all iCI. In aggregationtheory,the
orderof a macrorelationneed not be equal to and is gen-
erallysmallerthan the orderof the correspondingmicro-
relation.While a measurementfunctionmaps A into B
and I into J, an aggregationfunction (or simply an
aggregation)maps Aminto Bn and I into J, wheren may
be less than, equal to, or greaterthan m.
In general,an aggregationfunction,Bwhich maps Am
into Bn resultsin a loss of information(inabilityto finda
exactly fromthe knowledgeof b =3(a) unless ,Bis 1-1),
regardlessofwhetherm _ n or m< n. An aggregationfunc-
tion , is often called a disaggregationfunctionwhen
n > m, but obviouslyn> m does not mean that some new
information is added as a resultof disaggregation.A dis-
aggregation function resultsin a loss ofinformation ifit is
many-to-onejust as an aggregationfunctiondoes.
2 See, forexample, [88, 111], etc.
3 All functionsin this article are assumed to be single-valuedunless stated
otherwise.
767
, am) = Qp(c)(fl(al,
a2, * , am)) (2.2)
Note that (2.1) may be consideredas a special case of
(2.2).
Although there have been several attempts directed
toward developing aggregation theory based on rela-
tional systems,4an overwhelmingly large portionof the
literatureon aggregationdeals with systems which in-
volve only functions.Furthermore,in most such cases,
each microsystemand macrosystemconsistsof only one
function.We shall,therefore,studya singlefunctioncase
below in moredetail, keepingin mind that it is a special
case of aggregationsin generalrelationalsystems.
2.2 Functions
If a relationP of orderm definedon A is such that for
any (a,, a2, . .. , am)and (a,', a2', * * , am') in P,
a = a,' forall i E M, = ai = a, forall j E M2 (2.3)
whereMl$0, M2 0, M,nM2=0, and MU,JM2=M,
withM beinga set ofintegers1, 2, - - *, m,thenP can be
representedby a single-valuedfunction.Withoutloss of
generality,assume that Ml = (1, 2, * * -, k) and 1112
=-(k+, * *- , m). Then a functionq may be definedon
a subset of Ak withits rangecontainedin Am-k such that
4(a,, a2, ... , ak) = (ak+1, * * * , am)
X (ai, a2, ... , ak, ak+l, * , am) 6 P (2.4)
forall (a,, a2, * - * am) in Am.
Assume that an aggregationfunction,Bis also decompos-
able accordingly,namely
/3(a,, a2, ... , am)
= (g(a,, a2, . *, ak), '(ak+l, . . ., am)) (2.5)
where the ranges of g and i& are contained in B' and
Bn-I, respectively.Generally, we have 1< k and n-I
<m-k, but as discussedearlier,thisneed not be thecase.
Now consider relational systems (A, P) and (B, Q)
where P and Q are the only relationsin the respective
relationalsystemand each may be representedby func-
tions 4 and h, respectively.Let X and V be the domain
and the range of the functiono, respectively,and W and
Y be the domainand the range,respectively,of the func-
tion h. Then by definition
XC Ak, V C Am-k,WCBl, YCBn- . (2.6)
Let us thenconsiderthe meaningofa consistentaggrega-
4 See, forexample, [1211,whichdiscussesaggregationsforarbitrarybinaryrela-
tions, [93], whichtreatsarbitraryfiniteBoolean relationmatricesfromtheaggrega-
tionstandpoint,etc. Also, Dr. David Rosenblatthas pointedout to the authorthat
a homomorphism approach to relationalaggregationof model structuresmay be
foundin A. Jaegerand K. Wenke,Lineare Wirtschaftsalgebra, Stuttgart,1969.
768 Journalof the AmericanStatisticalAssociation,December 1971
tiongivenin (2.2) in this aggregationstructure.We have we are not concernedwiththe determinationofthe value
fourfunctionsrelated as follows. of the dependentmicrovariablev but only of the value of
its aggregate;/(v) in many of the aggregationissues. Let
X 0>V us, therefore,substitutethe compositefunction41(p(x))
by a functionf(x) and call it a principalfunction.This is,
gI 1 (2.7) like an empiricalrelationalsystemin the case of measure-
h
ment,what we are ultimatelyconcernedwith. However,
(The condition(2.2) fora consistentaggregationand the we want to determinethe value off(x) based on an aggre-
condition(2.5) forthe decomposabilityofthe aggregation gate w = g(x). If an aggregationis consistent,this can be
assure that the range of g is includedin W and the range done sincefrom(2.9) we see the equivalencebetween(2.2)
of VIis includedin Y.) These fourfunctions4, h, g, and At and the conditionthat
maybe called a microfunction, a macrofunction, an active h(g(x)) = f(x) forall x E X. (2.10)
aggregationfunctionand a passive aggregationfunction,
respectively.Now the condition(2.2) can be interpreted Since we now have only one aggregationfunction,let
to mean that us call g(x) simplyan aggregationfunctionand h(w) an
aggregatedfunction.Let us also call the compositefunc-
4 (x) = v=h(g(x)) = {(v) forall x E X. (2.8) tion h(g(x)) a surrogatefunctionby the reason that will
q (x) 5 v =4h(g(x)) # A(v) becomeclearlater.
Althoughthe value off(x) is our ultimate concern,it
If an aggregationis consistent,satisfyingthe condition is inconvenientas a practicalmatterto ascertainthevalue
(2.2), whetherq(x) = v holds (correspondingto the left- of x directlyand calculatef(x) in the situationswherean
hand side of (2.2)) can be determinedsolelyfromwhether aggregationissue is raised. Rather we are giventhe value
h(w) = y holds (its right-handside) where w = g(x) and of an aggregateof x, namely w = g(x). We then want to
y=O,t(v).If the values of x and v are available, one can determinethe value off(x) fromw by applyingthe func-
easily determine whether +(x) = v by plugging these tion h. In otherwords,h(g(x)) is a surrogatefunctionfor
values into the functionq5.In an aggregationproblem, the principalfunctionf(x). From a practical viewpoint,
one is not supplied with the values of microvariablesx the surrogatefunctionis supposed to have some advan-
and v, but instead he is providedwiththe values of their tages over the principalfunctionin termsof ease of com-
aggregatesw and y. The question is: under what condi- putation,availabilityof data, etc.
tions can one determinecorrectlywhether4(x) = v holds A functionf partitions its domain X into a set of
in the microsystemby knowingtheir aggregatedvalues equivalence classes [x] =f'-(f(x)), i.e., the set of all ele-
w and y only, assuminghe has perfectknowledgeof the mentsin X which are mapped intof(x) under the func-
formsof all functionsinvolved? tionf. If
To determinewhetherx and v satisfyq+(x)= v fromthe
values of w and y, one must firstdeterminethe value of [xB]C [x]f forall x E X (2.11)
v uniquelyfromthe value of y. This is possibleifand only the functiong is said to be finerthan the functionf, or
ifAtis 1-1.5 But on the otherhand the value of x need not equivalentlythe functionf is said to be coarserthan the
be determinedfromthe value of w because what is of functiong.6Then it can be easily seen that a functionh
interestis not the value of x but the value of q?(x). whichsatisfies(2.10) existsif and onlyifg is finerthan!.
If Atis 1-1,"whether k(x)= v" is equivalentto "whether
VI(4(x)) =Vl(v)." Hence the problem is to determinethe 2.3 DifferentialFunctions
latter,namely "whetheri,t(4(x))= y," fromthe values of We have now seen how the condition(2.2) forthe con-
w and y, by checkingwhetherh(w) = y holds. Clearly, sistencyof aggregationin the most generalformmay be
thisis possibleifand onlyifthe functionh satisfies made morespecificas the underlyingstructurebecomes
=
h(g(x)) {t'(+(x)) for all x E X. (2.9) morespecific,namely(2.2) (2.8)zz>(2.9)zz>(2.10) (2.1 1).
Let us continue this deductive process on aggregation
The conditionthat the passive aggregationfunctionbe
consistencyfora fewmoresteps, startingwithdifferenti-
1-1 appears to be unreasonablystrong.For example,if a
able functions,then moving to linear functions,and
microfunction is ? (x) = v wherex is a vectorof individual
finallyto input-outputsystems.
income and v is a vector of individual consumption,the , xn,wherexi
Iff is a real-valuedfunctionof xi, x2,
conditionthat the passive aggregationfunctionbe 1-1
is a vectorofri real variables,and gi is a real-valuedfunc-
meansthat individualconsumptioncannot be aggregated
tion of xi (i =1, 2, *. . , n), the necessaryand sufficient
into national consumptionif the aggregationfunctionis
conditionfor the existenceof an aggregatedfunctionh
to be consistent.But ordinarilythe passive aggregation
such that
functionis incorporatedin the microfunction itself,since
h(g1(xi),g2(x2), , gn(xn)) = f(xl, x2, , x?) (2.12)
I This can also be prored as follows.If /(V-) =&(V2) forsome distinctelementsv
and 12 in V and +(x) vl forsome x in X, then the firstconditionof (2.8) implies
h(g(x)) =&(vl) and the second conditionimpliesh(g(x)) ,d&(Ss). This is a contradic- 6 See, forexample, [71], wherea similarproblemis raised in the contextof in-

tion. Hence Qtis 1-1. formation theory.

Fundamental
QueriesinAggregation
Theory 769
for all (Xl, x2, , xI) in the domain X of f, is, from derivedindependeatlyby Leoutief [63] and is called the
(2.11) Sono-Leontieffunctionalseparability.7This became one
of the mostfundamentaltheoremsin aggregationtheory.
J1=1[Xi] ' [XI,)2, * * , Xnlf (2.13) Several articlesfollowedthis,refining
theconcept.Among
forall (xi, x2, , xn)in X, whereil representsa product thoseconceptsdeveloped furtherare the additivesepara-
set. bility [63, 64], the strongand weak separability [10s,
Let us consideran importantspecial case of such func- 109, 41, 42, 43], and the Pearce separability [84] (see
tions.Assumethatf has continuouspartial derivativesof also [40]) dealing with more general cases where more
the first,second, and thirdorderand all the firstpartial than one gi(xi)are involved.8
derivatives are nonzero. Consider an aggregation of 2.4 LinearFunctions
(x1, x2) into (g(xi), x2) and consider the necessary and
sufficientcondition for the existence of an aggregated Iff and g are linearfunctionsofx in Rn,9representedby
functionh such that matrices A (mX n) and B (kX n) as

h(g(x2),x2) = f(xl, X2) (2.14) y = f(x) = Ax (2.22)

w = g(x) = Bx, (2.23)
wherexi = (xi,, X12, .. , x>) and x2= (X21, x22, * .*, x
From (2.13), we have equivalently then [x]f has the propertythat
g(xl') = g(xl") =?>f(x1',x2) = f(xl", x2) (2.15) [X]f = {x' + xo?Ixo N(A)} (2.24)
forany givenxi' and xi" and forall x2.This is also equiva- where x' is an arbitraryvector in [x]f and N(A) is the
lent to null space of A.
Similarly,
f(xl', x2') = f(xl", x2') ==wf(xl', x2) = f(xl", x2) (2.16)
[x]= {x + xoI xo C N(B)}. (2.25)
forany given x1',xi", and x2' and forall x2.This implies
that Thus the condition(2.11) is equivalentlystated as
N(B) C N(A). (2.26)
aX2k(XIi / xL- (2.17)
Let Bt be the generalizedinverseof B, namelya matrix
for all zi= 2 which satisfiesthe four equations for an arbitraryma-
k =1, 2, ...* s. trixB.
Let fa = atf/aXa
and fab = 02f/OXaat3b. Since BBtB = B, BtBBt = Bt,
-
(BtB)T = BtB, (BBt)T = BBt (2.27)
a (fa/fb) =
a
(2.18)
axe b whereT is fora transpose.(See [85] forthe existenceand
the uniqueness of Bt forany matrixB). Using the gen-
this expressionis equal to zero if and onlyiffac/fa =fbc/fb.
eralizedinverseofB, thenullspace ofB can be expressedas
Therefore,(2.17) can be writtenequivalently
N(B) = {x I x = (I-BtB)s:s (2.28)
{tk= 1, 2, .. * :s
Rn}.
,2
E

fii.2k = V2kfii for all (2.19)

This is because xo in N(B) may be representedas xo
= (I-BtB)s (by setting s=xo) while any vector in
whereV2k =fii,2k/f1i is a functioninvariantwithrespect the form of (I-BtB)s is in N(B) since B(I-BtB)s
to i. On the otherhand, if (2.19) is true, =(B-BBtB)s=(B-B)s=O by the first equation in
(2.27). Thus (2.26) is equivalent to
- fli2kdxl
X2k
=fdxi1} = (2.20) A(I - BtB)s = 0 forall s C Rn (2.29)
= P2k1 Eifisdxi } or
forall i=1, 2, * r and k=1, 2, * s. Hence ABtB = A. (2.30)
a This is equivalent to a conditionthat each row of A must
lflidxli 0 -{ .1 flidxi} = 0 (2.21)
be a characteristicvectorof BtB associated withthe char-
acteristic root of 1. If A(mXn) and B(kXn) satisfy
forallk = 1,2, * * s
(2.30), then thereis a matrixC of the form
fromwhich(2.16) is derived.Thus it is shownthat (2.19)
is equivalent to (2.14). 7 See [78] fora historicalnoteon theseparabilityand a surveyofrelatedarticles.
Condition (2.19) was derived by Sono [105] and was 8See also [19] fortopologicalanalysisof the separabilityof utilityfunctions.
9RI representsan n-dimensional real or complexspace. If it is takento be a com-
originallypublished in Japanese in 1945. It was also plex space, a transposein thissectionmeansa conjugatetranspose.
770 of theAmerican
Journal Statistical December1971
Association,
C = ABt + S(I - BBt) (2.31) For total consistencywe must have y= z for all x, and
this is clearlysatisfiedif and only if
whereS is an arbitrarymXk matrix,with the property
that QT = TP. (2.41)
CBx = Ax forall x C Rn. (2.32) The necessaryand sufficientconditionon P and T forthe
existence of a matrix Q satisfying(2.41) can then be
This can be readilyseen from derivedby using (2.30) in whichA = T(I-P) and B = T
CB= ABtB+S(B-BBtB)=A+S(B-B) = A (2.33) are substituted:

due to (2.30) and the firstequation in (2.27). Thus when T(I - P)TtT = T(I - P). (2.42)
the principalfunctionand the aggregationfunctionare Using TTtT = T (see (2.27)),
linear, the condition (2.2) is equivalently stated by
(2.30). 10 TP(I - TtT) = 0. (2.43)
Since any vector in the formof (I- TtT)z is in the null
2.5 Applications
space of T, this is equivalent to
The foregoingconditionsfortotallyconsistentaggrega-
tions or some variations of them have been applied to TPx = 0 forall x in N(T). (2.44)
many areas, some of whichhave already been mentioned By requiringthe diagonal elementsof P and Q to be
above. Since it is not practicallypossible to discuss all zero (the net method) and each columnof T to have one
such applications and variations, let us choose a few and only one non-zero element, two conditions were
examplesto explorein some detail." derivedby Hatanaka [47], namely, (1) the microsectors
One area where the consistencyissue has been most aggregated into the same macrosectormust not have
extensivelyexploredis the structureof input-outputsys- mutual transactions,and (2) they inust also have the
tems. An input-outputstructureis representedby same cost structurevis-a-visall othermacrosectorswhen
V= (I - P)x a microsystem, (2.34) prices of originalcommoditiesare used as weightsof ag-
gregation.However,the firstpointwas later provedto be
y = (I - Q)w a macrosystem, (2.35) unnecessarywhen the gross method is used (without
w = Tz an active aggregationfunction, (2.36) eliminatingintrasectortransfers)or whenthe net outputs
y = Tv a passive aggregationfunction, (2.37) of aggregatedsectors are definedproperlyto eliminate
such mutual transactions[68].12
wherex and w are vectorsof total production,v and z are The formof the macro input coefficient matrixQ may
vectors of final demand, P and Q are matricesof input be determinedwhen the aggregationis consistent,by
coefficients(the firstitemofeach pair beingforthe micro- applying (2.31), namely
system and the second for the macrosystem),T is a
(I - Q) = T(I - P)Tt + S(I - TTt) (2.45)
matrixrepresentingan aggregationfunction,and I is an
identitymatrixof a suitable dimension. where S is an arbitrarymatrix. Ordinarily,T has the
As stated before,the passive aggregationfunctionhas propertythat each column of T has one and only one
to be 1-1to attain totalconsistencywhereasT is generally non-zeroelementand each row of T has at least one non-
not 1-1. To avoid this difficulty,the passive aggregation zero element,hence T has fullrow rank,or TTt = I. Thus,
functionin an aggregationproblemdealing with input- from(2.45)
output systemsis usually incorporatedinto the micro-
system to forma principal function(see the argument
Q = TPTP (2.46)
leading to (2.10)). Thus we forma principalfunction Here, Tt may be substitutedby any matrixT such that
TTI, for
y = T(I - P)x (2.38)
and an aggregationfunction
Q = TPT = TPTtTT = TPTt (2.47)

w = Tx (2.39) whichis obtained by using (2.43).'3

as well as an aggregatedfunction
z = (I - Q)Tx. (2.40)
10See [86, 53, 541. The approachby Theil [112] whichhas providedbasic stimuli
on the aggregationtheoryis different fromthe above approach dealingwithtotal
consistency.We shall see this in a later section dealing with aggregationerrors
and biases.
11Applicationsof the separabilityconcepthave been developedprimarilyin the
area of utilityfunctionsand productionfunctions.See [108, 109, 41, 42, 431 on
utilityfunctionsand separability.See also [102, 103, 104,25, 26, 27, 48] on produc-
tionfunctionand separability.
Generally,the purpose of the input-outputanalysis is
to findthe total productionfromthe finaldemand. Hence
the independentand dependentvariables in (2.34)-(2.37)
must be reversed.However,since the micro-and macro-
functionsare both 1-1, the conditionsof (2.41) or (2.44)
12 For furtherdiscussions on the consistentaggregationin the input-output
model,see [5,69, 91, 92, 113,3, 79]. See also [49, 9] forqualitativecharacterization
of some desirablepropertiesof aggregationsin input-outputsystems.See also [14]
formoredetailedmathematicalanalysisofinput-outputsystems.
13See, forexample,Fei [24] fora further discussionon the matrixQ and its dis-
aggregationinto i = TQiI.
 QueriesinAggregation
Fundamental Theory 771
are also the necessaryand sufficient
conditionforthe in- cernedwiththe relationalidentifiability expressedin (2.2)
vertedstructure.14 or its successive variations discussed above but rather
A related problem in the input-outputanalysis is a witha similarityofsome characteristicsof a microsystem
dynamiclinearsystemx(t+ 1) = Px(t) whereP is a transi- and a macrosystem.Such characteristicsmay be the
tion matrixwhose row is a probabilityvector. It is clear monotonicityof functions,the equilibriumstate, etc., as
that (2.41) is the necessaryand sufficient
conditionfor elaboratedlater.
total consistencywhichmeans Those types of partial consistencywhichare still con-
cerned withthe identifiability issuesmaybe classifiedinto
TPtx(o) - QtTx(o) forall x(o) (2.48)
constrainedconsistencyand filteredconsistency.In de-
where Q is a transitionmatrixforthe macrosystemand terminingthe identifiability of the variables,the domain
T is a matrixforan aggregationfunction.It has also been of a functionin a microsystemis constrainedin con-
derivedthat if the microsystemis stable, the macrosys- strainedconsistency,while its range is aggregatedin fil-
tem is also stable and ifthe microsystem is unstable,so is tered consistency.
the macrosystem,providing(2.41) is satisfied."5 In the next section,we shall discuss constrainedcon-
The famousdecompositiontheoremon linearprogram- sistencyfirst,and then filteredconsistency,followedby
mingcan also be consideredas an aggregationproblem.'6 characteristicconsistency.
Also the sufficiency conditionfora consistentaggregation
has been exploredfora set of linear programmingprob- 3. PARTIALCONSISTENCY
lems max cixi,subject to A ixi< bi (i = 1, 2, * - - , k) which 3.1 Constrained Consistency
is to be aggregatedto max cx, subject to Ax<b, where
If total consistencyis difficultto attain, one way of
x = Xxi and b = IN '
relaxing the condition is to impose constraintson the
An applicationofthetotalconsistencyconditionsto the
variables. In the case of the most generalrelationalsys-
index numbertheoryresultsin such a trivialconclusion
tem, this means that the equality in (2.2) is no longer
that most of the index numbertheoryhas been devoted
requiredto hold forall (a,, a2, - - , am)in Pi but onlyfor
to otheraspects of aggregationas we shall see later. Sup-
thosein a propersubset ofPi. In the case ofa singlefunc-
pose a, p, and q are columnvectors of base year prices,
tion, the equality in (2.10) is requiredto hold only forx
current-yearprices, and quantities, respectively,and
in a propersubset of the domain of the functionf.
y= pTq is the total expenditureto be estimatedfromthe
A typical way of constrainingthe variables is to con-
value of an aggregatew=-aTq by applyingan index num-
sider consistencyonly forequilibriumvalues of the vari-
ber. Then it is an immediateconsequence of (2.30) that
ables. The idea behindthisapproachis thatifour concern
to identifyy fromw forall values of q, it is necessaryand
is with the state of equilibriumonly, when consistency
sufficient to have p = aa where a is a non-zeroscalar. In
betweenthe microsystemand the macrosystemforother
otherwords,all prices must move proportionatelyto be
values of variables is not of interest.
able to use price indices for exact identificationof the
In a linearsystem,the variables may be constrainedto
total expenditures.An entirelyanalogous statementcan
a subspace of the domain of the linear function.For ex-
be made on quantityindices.
ample, if G is a singularmatrix,the domain of the func-
2.6 Comments tionsrepresentedby matricesA and B maybe constrained
to the range of G. This is equivalent to requiringuncon-
The conditionsfortotal consistencyare quite stringent.
strained (or total) consistency between y =AGx and
This stringencymakes it more challengingto search for
w= BGx. Hence, the condition(2.30) is relaxed to
total consistencybetweentwo seeminglyunrelatedrela-
tional systems. However, if we attempt to aggregate (AG)(BG)t(BG) = AG (3.1)
variables in a given relational system preservingtotal
consistencybetweenthe originaland the aggregatedsys- For example,suppose that national consumptionis to
tems,we oftenfindit impossiblebecause ofthe stringency be determinedfromnationalincomewhereindividualcon-
of the conditionsfortotal consistency.In such cases, we sumptionis a linear functionof individual income and
may stillwant to look fora way of aggregatingvariables that nationalincomeand nationalconsumptionare simple
preservingpartialconsistency. We shall explorethisin the sums of individual variables. A necessaryand sufficient
next section classifyingpartial consistencyinto three conditionfortotal consistencyis the equality of marginal
categories. propensityto consume foreveryindividual. However, if
Characteristicconsistencymay be separatedfromother individual incomeis constrainedso that it always moves
approaches in partial consistencyin that it is not con- proportionately,then national consumptioncan always
14 See the approachin [5 1 whichdeals withthe invertedstructure. This approach
be determinedfrom national income regardless of the
has a disadvantageover the approach in the text since it requiresthe inversionof individual marginalpropensityto consume.
the matrices(I-P) and (I-Q). See [67].
15See [3 ]. See also the discussionin [91, 92, 55, 94]. The approachby Simonand The idea of constrainedconsistencyhas been observed
Ando [99] dealing with a dynamiclinear systemis different as we shall see in a in much of the aggregationliterature.For example,in the
latersection. articles dealing withproductionor utilityfunctionscited
16 See [17].
17 See [18, 76, 611. in the previoussection,some kinds of equilibriumcondi-
772
tionsare imposed,e.g., the existenceofcapital aggregates
underthe conditionof an optimumlabor allocation.
The approach by May [73] is also an example of con-
strained consistency.There, the microfunctionand the
aggregationfunctionare fixedand a question is raised on
the kind of macrofunctionsthat may be constructedso
that the entirestructureis consistentprovided that the
microsystem is at the generalequilibrium.'8
In an input-outputanalysis,it has been observedthat
if the outputs of all sectorswhich are aggregatedinto a
singlesectorare constrainedin such a way that theymove
proportionately, an aggregationis consistentregardlessof
the input coefficients of these sectors [69].
In the index numbertheory,the idea of constrained
consistencyis also extensivelyused. Frisch [38] discusses
an "atomistic approach" in which prices and quantities
are assumed to move independentlyand a "functional
approach" in which some characteristicrelations, e.g.,
those based on indifference curves, are assumed to exist
betweenprices and quantities.
The distinctionbetweenconstrainedand unconstrained
consistencydepends only on the definitionof the domain
of the principalfunctionwhich need not be in a general
formsuch as Rtn. The domainmaybe thatof {x ?0: xCRn I
or moregenerally{xCK } whereK is any subsetofRn.
Therefore,in any aggregationstructureit is not always
clear whetherthe variables are constrained"naturally"
based on the characteristicsof the empirical situations
that are dealt with or whetherthey are constrainedfor
the sake of obtainingconsistentaggregates. It is, how-
ever,importantto note here that the idea of constrained
consistencyconcernsthe directiontoward which the ag-
gregationanalysis may be directed.Once a structureis
preparedand it is foundthat total consistencycannot be
attained,aggregationanalysissuggeststhat the variables
may be constrainedin some meaningfulway so that for
such values of the variables the structureis consistent.
It is of minorimportancewhetherthe result of such a
studyis presentedin the formof constrainedconsistency
or in the form of unconstrainedconsistencyafter the
domain of the variables is changed.'9
3.2 FilteredConsistency
In contrast with constrainedconsistencywhich con-
cernsthe domainofthe principaland surrogatefunctions,
filteredconsistencyconcernstheirranges. It stems from
the idea that an exact identificationof the values of de-
pendent variables may not be an ultimate objective of
constructinga structure.If, forexample,a decisionis to
be made based on thevalues ofdependentvariables,some
differences in theirvalues may be toleratedifthe decision
is relativelyinsensitiveto such differences.
In termsof relationalsystems,filteredconsistencyre-
18 Note an objectionto havinga macrofunction dependentupon the equilibrium
conditionsofthe microsystem raisedin [581.
19In this regard,if a structureis foundto be totallyconsistent,it may also be
usefulto considerwhetherthe domain of the variables can be extendedwithout
losingtotal consistency.
Journal
of theAmerican
Statistical December1971
Association,
quires that, in addition to the micro-and the macrosys-
stem,thereis anothersystem,e.g., a decisionsystem,for
each ofthe microsystemand the macrosystem.This addi-
tional system utilizes the values of the characteristic
functionPi(a) and Qp(j)(j(a)) whichare related by (2.2),
wherea = (a,, a2, * - - , am). If ykand 3kare characteristic
functionsrepresentingthe ways in whichsuch values are
utilizedin the additionalsystem,filteredconsistencymay
be stated as
7k(ay (Pi(a))iery b) = bk(1(a), (Qc(i)(a))ic=r b) (3.2)
for all a= (a,, a2, - - -, am) in Pi and for all iCI and
kc r, wherer representsthe set ofall indicesfordifferent
uses and b = (b1,b2,* * *, br) is a set of otherfactorsused
in the additional system.
For a singlefunctioncase, thismay be stated as follows.
If we let c and d be functionsin the additionalsystem,we
substitutefor (2.10)
d(h(g(x))) = c(f(x)) forall x E X. (3.3)
Typical examples of such functionsare predictionfunc-
tions, decision functionsand payofffunctions.20 To use
the value of the surrogatefunctionh(g(x)) in the same
way as the value ofthe principalfunctionf(x) is used, we
would furtherwant to have d=c. These functionsmay
also be stated so that theirargumentincludes variables
representingsome externalfactors.In any event, c and
d act as a filteringdevice and the consistencyissue is
raised afterthe variables have been filtered.
In a linearsystem,ifthefiltering
functionis represented
by a matrixH which is to be applied to dependentvari-
ables in both the principaland the surrogatedfunctions,
filteredconsistencybetween y = Ax and w = Bx becomes
equivalent to unfilteredconsistencybetween HAx and
HBx. Thus the condition(2.30) is changed to
= HA
(HA)(HB)t(HB) (3.4)
whichis a weaker conditionthan (2.30) unless H is non-
singular.
It is, of course, possible to combine constrainedcon-
sistency and filteredconsistency.In a linear case, this
means that we change (2.30) to
(HAG) (HBG)t(HBG) = HAG (3.5)
which is a weaker conditionthan (2.30) unless G and H
are both non-singular.
An example of filteredconsistencyis observed in the
information-decision theorywhere a decision functionis
used as a filterand the consistencyissue is raised in terms
of the sensitivityon the decisions.21
While constrainedconsistencyhas been utilized quite
extensivelyin various kinds of aggregationstructures,
filteredconsistencyhas not been emphasized,partlybe-
cause of the difficultyin specifyingthe filterexactly. For
example, in the input-outputanalysis, the total produc-
tion, which is derived from the final demand, can be
20 aggregationand reasonableaggregationin [5 ].
See the conceptsofsatisfactory
21See, forexample, [71, 721.
Fundamental
QueriesinAggregation
Theory 773
filteredby a functionH which representsthe way in characteristicconsistencyis the index numbertheory.23
whichgovernmentspendingforeach sectoris determined Althoughthis theoryis also related to otherapproaches
fromthe total productionof all sectors.The consistency to be discussedlater, many of its articlesdeal with char-
issue can then be raised on the effectof aggregationon acteristicconsistency.
governmentspending.Unfortunately, to specifythe func- The kindsof characteristicsthat are oftendiscussedin
tion H forgovernmentspendingis oftenfarmoredifficult the indexnumbertheoryare representedin termsofsome
than specifyingthe matrixof input coefficients. Never- tests,such as the identitytest (Po, = 1), the base test
theless, it is importantto recognize this possibilityin (P28/P1, is independent of s), the time reversal test
analyzing an aggregationstructure. (P01P10= 1), the factorreversaltest (P01Qo-= V0,,where
Of course,just as constrainedconsistencycan be pre- P0i, Qo,land V01are the price,quantity,and value index,
sented as unconstrainedconsistencyby redefiningthe respectively),the circulartest (Po1P12= Po2), the determi-
domain of the function,filteredconsistencycan also be nation test (the index does not become zero, infiniteor
presentedas unfilteredconsistencyby incorporatingthe indeterminate, ifan individualpriceor quantitybecomes
filteringfunctioninto the principal and the surrogate zero), the proportionalitytest (pi=apo= a0po1=oza where
function.As in the case of constrainedconsistency,what pi and po are pricevectorsand a is a non-zeroconstant),
is importantis to recognize this as a directiontoward etc.
whichthe aggregationanalysis may be directed. I. Fisher [28] consideredthe timereversaltest and the
factorreversaltest to be the most crucial tests and de-
3.3 CharacteristicConsistency
veloped a so-called "ideal" index numberby taking the
The thirdtype of partial consistency,which we shall geometricmean of Laspeyres (base-year weighted) and
call characteristicconsistency,is differentfrom others Paasche (current-yearweighted) indices,which satisfied
already discussed in the sense that it is not concerned both reversaltests.24
withtheidentification ofthevalues ofvariablesbut rather Divisia [20] developed an importantformulafromthe
whethercertain characteristicsof the microsystemare viewpointof characteristicconsistency.The price index
transformed into anothercharacteristicof the macrosys- P is defined by dP/P= (2qjdpj)/(2;q4pi) and P is de-
temunderan aggregationfunction.If flk and Okare charac- rived by integratingit along a path of transformation.
teristicfunctionswhose value is 1 if theirargumentshave The quantity index Q is defined analogously. These
a certain characteristick and is 0 if not, characteristic indices not only satisfythe two reversal tests, but also
consistencyrequires they are the only indiceswhose differentials are linear in
the differentials of prices and quantities such that price
77k(A, (Pi)iEEr)= Ok(B, (Qo(i))iEr) (3.6)
indices do not change when quantitiesalone change,and
forall kCA whereA is a set of indicesfordifferent char- vice versa [21].25
acteristics. Generally, characteristicconsistencyis de- Using the Divisia indices, Dresch [21] examinedhow
pendent on whethera given characteristicin the micro- equilibriumconditionsin a microsystemmay be trans-
systemis preserved in the macrosystem;therefore we have formed into equilibrium conditions in a macrosystem
1k = Ok- whenpricesand quantitiesof the commoditiesare aggre-
For example, if the microfunctionis a monotone in- gated, which is another example of characteristiccon-
creasingfunction,does the macrofunctionalso have this sistency.
property?Or if the microsystemis at an equilibrium,is Althoughcharacteristicconsistencyis of great interest
the macrosystem,too? froma theoreticalviewpoint,it is less significantfroma
The kindsof characteristicsthat concernus depend on practical viewpointwhere prediction(e.g., predictionof
the nature of the aggregationstructureswith which we y fromw in (2.10)) is ofprimaryinterest.For thisreason,
are dealing. Let us reviewsome examples of those which several articles have been devoted to another aspect of
have appeared in the aggregationliterature. aggregation,namelythe measurementand evaluation of
Klein [57] consideredthe conditionson the aggregation errorsand biases due to aggregation.
functionneeded to assure that ifthe profitmaximization In the next section, therefore,let us review some
conditionis satisfiedin the microsystem, the same condi- articles on discrepanciesdue to aggregation.Then, we
tion is satisfiedin the macrosystem.He also provided shall take up the problemof evaluating an aggregation
some examples under which such conditions are satis- functionin view of these discrepanciesand of selecting
fied.22 the best aggregationfunctionin termsofgivenevaluation
In dealing with matrix models of resource flows,D. criteria.
Rosenblatt [93] consideredthe conditionson the aggre-
gation functionT underwhich the non-negativityof the
micromatrixof input coefficientsP implies the non- 23 See [13], fora historicalreviewof indexnumbers.
24 Both the Laspeyresindicesand the Paasche indicesalone satisfyneithertests.
negativity of the macromatrix of input coefficientsA. The Marshall-Edgeworth indexwhoseweightsare the sum ofthe base-yearweights
An importantgroup of problemswhich deal with the and the current-yearweights,satisfiesthe time reversaltest but not the factor
reversaltest.
26 See also the formulasgiven by Stuvel [110] whichalso satisfyboth reversal
22 See also the criticismof his approachby Pu [90] and his replyin [58]. testsand also Banerjee [6 ] forfurthergeneralizationof Stuvel's indices.
774 Joumalof theAmerican
Statistical December1971
Association,
4. ERRORSAND BIASES firstis the consistency approachwhichwe have already
4.1 Determination of Errorsand Biases analyzed in the earlier sections.The secondapproachis
topreparea disaggregation function bya statisticalfitting
To raisethe consistency issue,totalor partial,we fix oftimeseriesdata on x and w. We thusobtain
twoofthethreepartsin the aggregation structure (the
microsystem, the macrosystem, and the aggregation x = Dw + k + u (4.3)
function).We thenconsidertheconditionsthat the re- matrixand k is a vectorof
whereD is a disaggregation
mainingpart mustsatisfyforthe structure to be con-
constantssummingto zero, both of whichare obtained
sistent,totallyor partially.The fixedpartsmaybe the so that each elementin the
by the least-squarefitting
micro-and the macrosystem, in whichcase theaggrega- minimum variance,and
residual vector u has zero mean,
tionfunction is allowedto vary,or themicrosystem and
no correlation withw. Then
theaggregation function, in whichcase themacrosystem
is allowedto vary,or themacrosystem and theaggrega- z=ADw+Ak+h=ADBx+Ak+h (4.4)
tionfunction, in whichcase themicrofunction is allowed
to vary [112 . is used as a surrogate functionfor(4.1). Note thatfrom
In theanalysisoferrors and biaseswefixall threeparts (4.4), (4.1) and (4.3)
in the aggregationstructure, and analyze the severity E(z-y) =E(ADw + Ak +h
oferrors.The degreeof errorsdependson the valuesof -(ADw + Ak + Au + h)) (4.5)
the variable,hencesome representative value of such
errors(maximum, mean,etc.) maybe derived.Alterna- - E(-Au) = 0.
tively,the expectedvalue of errors,whichis called an However,theintercept ofthesurrogate function(Ak+h)
aggregation bias,maybe computedbasedon an assumed is not the same as that of the principalfunction(h),
probability distribution ofthevariableorbasedon a dis- bias of Ak. Furthermore, the
showingan aggregation
turbancewhichhas a knownmeanand variance. is
matrixA in the principalfunction changed to the
Afterrealizingthattotalconsistency is unattainable in ofx over
matrixADB whichdependson themovement
a givenaggregation structure,a possiblerecourse is partial
the timeperiodconsidered.27
consistency as discussedin the earliersections,eitheras
an alternative oras a supplement, orwemaycalculatethe 4.3 Input-Output Systems
error,such as h(g(x))-f(x) (see (2.10)), explicitly as a systemwas
The aggregation bias in the input-output
function of the independent variablesx. If the erroris In the function,
analyzedin [113]. ordinaryinput-output
notsignificant forsomeorall valuesofx,thenwe can use a disturbancefactorwas introducedas an additional
thesurrogate function h(g(x))as an approximation ofthe
factorto yield
principalfunction f(x).26On the otherhandif the error
or the bias is large,it willwarnus that the surrogate x = Px + v + u (4.6)
function maynotbe a goodrepresentation oftheprincipal earlierin Section2.5 and
whereP, x, and v are as defined
function. Suchdetermination oferrors andbiasesis useful The prediction ofx is based
u is a vectorofdisturbances.
notonlyin evaluatingtheaggregation structure butalso
on
in modifying it or in selectingthebestsystemwhenthe
remainingtwo parts in the aggregationstructureare t = (I - P)-lv (4.7)
fixed. whilex is from(4.6)
Let us reviewthe aggregation literature whichdeals
withtheanalysisoferrorsand biasesin aggregation. x = (I - P)-1(v + u). (4.8)

4.2 LinearSystems Hencetheprediction errorin themicrosystem is

One ofthemostimportant contributions in theaggre- e:,= x - x =-(I-P)-iu. (4.9)
gationtheoryis madeby Theil [112]. It dealsprimarily
withthe analysesoferrorsand biasesin aggregation. For themacrosystem,
Let w = Tx = T(I - P)-1(v + u) (4.10)
y = Ax + h (4.1)
as
whichwe predictbasedon themacrovariable
be a principalfunction
and
A= (I_- Qfty = (I- Qr1Tv. (4.11)
w = Bx (4.2)
Hencetheprediction erroris
be an aggregation whereA and B are matrices, 27 See also [1i foran introductionto Theil's work.Boot and deWit [12] applied
function,
x, y,and w are vectorsofvariables,and h is a vectorof Theil's theoryto someempiricaldata dealingwithinvestmentoftenlargeAmerican
constants.Two approachesare theninvestigated. The companies in 1935-54. It was pointed out that the basic problemin an empirical
analysis of aggregationis the fact that both micro- and macroparametersare
unknown.See also [114] on the estimationproblemin this regard,as well as [771
theide offilterigdiscusedin Section
2eWe can observe 3.2 on this approximna- in theaggre-
fora simpleexpressionforthe least-squareestimatesofthe coefficients
tionissue. gated function.
FundamentalQueries in AggregationTheory 775
e,=,-w-w = Mv+ Te, (4.12) of w by solving the followingtwo linear programming
problemsforsuch values of w.
where
M (I -Q)-T- T(I (4.13) (a.) Maximize aTx
= P)-1
(b.) Minimize aTx
Since
Subject to Bx < h
E(e.) = Mu + E(Te;) -Mv (4.14)
bTx = w
the factorMv is called the aggregationbias in the input-
output system.28 wherethe maximizationand the minimizationobjectives
are used in turnto obtain the upperand thelowerbounds,
4.4 Dynamic LinearSystems respectively.It should be noted that (4.18) need not be
critical
Simon and Ando [99] analyzed the behavior of a dy- solved for all values of w but only for some
namic linear systemthat is nearlycompletelydecompos- values.30
able, namelythe stochasticmatrixP = P*+,EC whereP* 4.6 Comments
is a stochastic matrix which is block diagonal, C is a
matrixwhose row sum is 0 foreach row and e is a suffi- There are many other areas where the aggregation
cientlysmallnumber.Based on the continuitypropertyof errorsand biases have been explored.3'Althoughwe are
characteristicroots,theyobservedthatintheshortrunthe unable to discuss even a good portionof them here, the
states in each block can be treated as if they were inde- foregoingexamples sufficientlydemonstrate the basic
pendentfromthe rest of the system.This is because the approaches that have been used in dealing withinconsis-
effectsof the characteristicroots, associated with the tentaggregationstructures.
block submatrixdominate the effectsof the remaining After identifyingthe aggregation errors and biases,
characteristicroots.They also observedthatin the middle our next problem is how to evaluate them and how to
run the effectsof the largestcharacteristicroots in each select the best aggregationstructureunder given evalu-
of the block submatrices dominate those of the rest, tion criteria.These are the subjects of the next section.
hence each block of states may be treated as if it was a
AND SELECTION
5. EVALUATION
single state. Of course in the long run the system is
dominated by the largest characteristicroot among all 5.1 LossFunctions
roots in P. Here the degree of dominationin the effects When total consistencyis so strictthat it can hardlybe
(hence the goodnessof approximation)depends upon the met in any practical situation,we can at least calculate
matrixC and the positivenumbere. the aggregation errors and biases as discussed in the
Ando and Fisher [2] extendedthese resultsto nearly previoussection.However,to evaluate the seriousnessof
decomposable (Q+ EC where Q is a stochastic matrix errorsand biases, we must have some criteriaforevalu-
which is block triangularand C and e are definedas ation. We would then develop a method of selecting
above.)29 optimum aggregationfunctionsin view of the chosen
evaluationcriteria.32
4.5 ErrorRanges
Perhaps the mostgeneralapproachis the one suggested
If the independent variables are constrained to a by Hurwitz [51]. He suggeststo take the decisionsto be
bounded set, it is oftenpossible to set up an upper and a made based on the aggregates,the outcome from the
lowerbound forthe dependentvariable y when it is esti- decisions,and the cost of aggregatingor not aggregating
mated fromthe aggregatew. variables and put them in a utilityfunctionF(g, d, 4)
For example,let where g is an aggregationfunction,d is a decision func-
y = aTx Then in some aggregations
(4.15) tion,and 4 is a microfunction.
the suboptimaldecisionsdue to aggregateddata may be
w = bTx (4.16) compensatedby the savingsfromaggregationso that the

wherex is constrainedby overall utilityfunctionmay be improved.The best ag-

Bx < h, (4.17)
and a, b, and h are vectorsofconstantsand B a matrixof
constants. Here, an exact identificationof y from w
(withoutthe knowledgeof x) is not possible unless b is a
scalar multipleof a. However, it is stillpossible to set up
an upper and a lowerbound fory at various or all values
28 See also[391foran approximationapproachin the input-outputsystem.
29 Seealso [55] whichexaminedthe effectsof aggregationon the possibleexpan-
sion factorsin the expandingvonNeumannmodel.
30See [521 fora computationalalgorithmforfindingall the extremepointsof a
convexset in thew -y spaces whichis mappedfromthe originalconvexset givenby
Bx <h, and also formanagerial-accounting uses of such a mapped convexset. See
also [79] wheretheboundsofthe distortiondue to aggregationare derivedwhenthe
independentvariablesare bounded.
81See also [4, 119, 82] whichemphasizethe non-additivityof economicvalues,
[741foraggregationbiases in technologicalchanges, [80] forthe consequencesof a
difference betweenthe periodofadjustmentin a distributedlag modeland the unit
periodforwhichthe data used in computingthe regressionare obtained,[831fora
computersimulationto indicatethe significanceof the aggregationerrorsdealing
with national income data, and [60] for aggregationerrorsin dealing with the
U.S. agriculturaldata.
32 The need forthis approachratherthan the consistencyrequirements has been
emphasizedin [116].
776 Journal
of theAmerican
Statistical December1971
Association,
gregationcan then be definedas one whichmaximizesF year data). This can be calculated withoutinvertingthe
fora givenmicrofunction 4. matrix (I-P) which is a considerable practical ad-
Althoughit is desirableto take into account an aggre- vantage.
gation cost or a nonaggregationcost, the aggregation The idea ofusinga quadraticloss functionas a criterion
literaturehas been primarilyconcerned with the loss was also applied to index numbersin [115], wheresym-
functionsdue to aggregationerrorsand biases. Let us, metricbest linear index numberswere derivedby taking
therefore, reviewthem next. the characteristicvectors correspondingto the largest
The most tailor-madeapproach is to develop a loss characteristicroot of PQTQPT (the price index) and of
functionL(y, z) forall values of y=f(x) and z =h(g(x)), QPTPQT (the quantityindex) whereP and Q are matrices,
xcX, and calculate an aggregated loss L based on a each row of which representsprices and quantities of
probabilitydistributionon x. The aggregatedloss may commodities,respectively,at a giventime.A fittingindex
be stated in termsof the expectedvalue or the median of was introducedas a measureof how good the indices are
L(y, z) or any othermeasures. This aggregatedloss can as a statisticalfittingto the actual pricesand quantities.
then be used to judge how good the surrogatefunction These best linearindex numberformulassatisfythe time
z = h(g(x)) is with respect to the principal function reversaltest but not the factorreversaltest.34
y=f(x). For a general case of linear systems,a squared-error
In many cases, however,the need arises to evaluate a measureis applied in [54] by the "aggregationeffective-
surrogatefunctionwithouthaving a specificloss function ness coefficient."If y= Ax is the principalfunctionand
or even without knowingthe distributionof x. In such w = Bx is the aggregationfunction,where A and B are
situations,some standard loss functionsand some stan- matrices, the degree of consistencybetween the two
dard assumptionsregardingthe distributionof x mustbe functionsmay be measuredby the aggregationeffective-
utilized. A quadratic functionof the Euclidean distance ness coefficientdefinedby
between y and z or the assumption of independent, 12
identical distributionsfor variables in x, etc. are often pI = 11ABtBI
I2/1JA (5.3)
utilizedforthis purpose. where II is the norm of the matrixinside, namely the
Attemptstowardestablishingsome standard means of square root of the sum of the squares of each elementin
evaluating a surrogatefunctionwith respect to a given the matrix,providing,of course A #0. It measures the
principalfunctionhave been developedin two directions, proportionof the variance of y that is reducedas a result
both dealing with linear aggregationsonly. One is the of the best use of w when x is a vector of independent
squared-errormeasures, and the other is the entropy variables with mean 0 and variance 1. The best use of w
measure. in reducingthe variance of y is given by estimatingy by
5.2 TheSquared-Error
Measures Cw whereC is the matrixgivenby (2.31). If the aggrega-
tion is consistent, then by (2.30) ABtB = A, hence
The uses of squared-errorsin evaluating aggregations p2=1.
have been studied most extensivelyby W. D. Fisher.33
When A is a rowvector,aT, the expressionofp2 in (5.3)
Let us brieflyreview some of his applications, starting
is reduced to an expressionwhichis equivalent to an ex-
with an application to the input-outputsystemin [31].
pressionforthe multiplecorrelationcoefficient. In addi-
Let bij and bjr be elementsof (I-P)-l and (I-Q)-1,
tion, if B is also a non-zerorow vector bT, we can define
respectively,and b j=EiEl bij where iCI means the
the linearaggregation expressedas
coefficient
summationis for all sectorsthat are aggregatedinto a
given aggregated sector I. A measure proposed for the p = aTb/(||a| .J|bJI). (5.4)
special purpose prediction,in whichthe predictionerror
of a particular aggregatedsector is of interest,is then Note that the square of p is the aggregationeffectiveness
given by coefficientand that the expressionis the same as one for
the simplecorrelationcoefficient. The difference between
C1' = (bi. i-b) (5.1) the correlationcoefficientand the aggregationcoefficient
is that the formerdeals with a variable space and the
wherevj is the finaldemand of thejth sectorand the bar latter a functionspace, one being the dual space of the
indicatesthat the variablesare based on data in the base other in the case of linear systems.In a correlationan-
year. For the general purpose prediction,C'=JC1' is alysisbetweenvariablesy and w, we need not knowwhat
suggested.Also, a somewhatcrudermeasureis proposed makes them correlated.However in an aggregationan-
as follows: alysis, we know (or assume) that both variables are
derivedfromthe same variable x by y = aTx and w=bTx
C,/' = _1(ad - ar1)2 (5.2) and the coefficient
is calculated on the functionsa and b.35
wherearj= ,E aii and aij and 2rj are elementsin P and
Q,respectively,(Q beingaggregatedby means ofthe base in orderto obtain the best linearunbiased index
34 See [8] fora bias correction
numbers.See also [59] foranotherextension.
33See [29--35]. See also [16] whichuses quadraticloss functionsforgroupingdata. 35See [52, 53, 54] forfurtherdiscussionson the calculation of pa when x is not
See also [951 forfurtherelaborationofthe uses ofthe squared-errormeasure. normalizedand also on the managerialand accountinguses ofp2.
FundamentalQueries in AggregationTheory
A comprehensiveapproach to incorporatingquadratic
loss functionsin the aggregationproblem has been de-
veloped in [35]. The loss functionconsideredis a quad-
ratic loss functiongiven by
L = (z - y)S(z - y)
whereS is a symmetricpositive semidefinitematrixand
z is a predictionofy. The basic structureofthe systemfor
whichthe loss functionis applied is as follows:
y=Ax +u
Here, u, x, and A' are independentand
E(u) = 0, E(uuT)
E(x) =-, E(xxT) V (5.8)
E(A) = A, E(aaT) W (5.9)
where a is a column vector obtained by adjoining each
columnof (A -A) successively,and U, V, and W are all
symmetricpositive semidefinite.If a predictionis based
on a predictionfunction
z = Gx,
the cost c of using z for predictionof y, when the loss
functionis given by (5.5), is
c = r((G - A)TS(G - A)V)
wherer indicates the trace. Let
G = DCB
whereB is a matrixof aggregationwhich has a fullrow
rank and D is a matrixof disaggregationwhichhas a full
column rank. It can then be shown that G which mini-
mizesthe quadratic loss (5.11) forgivenB, D, S, and V is
G = D(DSDT)tDSAVBT(BVBT)tB
It should be noted here that the quadratic loss (5.11) is
based on microvariableswhereas the aggregationerrors
and biases are generallydefinedat the macrolevel.
Measure
5.3 TheEntropy
Anothertype of measure that has been developed to
quantify the degree of consistencyof an aggregation
structureis an entropymeasure.It is applicable only for
a special case of linear aggregationwhere the matrices
A and B are both probabilityvectors,namelyy = aTx and
w = bTxwherea and b are columnvectorswhose compo-
nents are non-negativeand sum to one, respectively.Let
log a and log b be the columnvectorswhose elementsare
logarithms(of any base) of elementsin the vectorsa and
b, respectively.Then, the entropymeasureis definedby
Iba = (-aT log b) - (-aTlog a) = aTlog(a/b). It is then easy to see that p2 wherep is definedin (5.4) is
Note that Iba = 0 if and only if b = a or bTx is consistent (5.14) is equal to ao.38
withaTx. If, on the otherhand,forsomei, the ith ele-
mentsof a and b are such that bP=0 and fl
then Iba
becomes infinite. Therefore, the measure penalizes
of a variable in the principalfunc-
heavily any omnission
777
tion fromthe aggregationfunction.Using the property
of geometricmeans, it can be shown that - aT log a
minimizes - pT log a among all probabilityvectors p.
Hence, lba is always non-negative.
This measureis a geometricmean, using elementsin a
(5.5)
as weights of the logarithmof the ratio of each com-
ponent
aixl/bixi= a/bi
in the two functions.Geomietrically, log q for all prob-
(5.6)
ability vectors q formsa convex surface. Furthermore,
pT(- log q) = c wherec = p(- log p) is a hyperplanewhich
supportsthe convex surfaceat q = p. Hence, lba expresses
U (5.7)
the degreeof deviation of b froma whichis measuredin
termsofthe difference in the constantc whichdefinesthe
hyperplanes aT(-log q)-=c when q=a and q=b are
substituted in.6
Althoughthe entropymeasurehas been used widelyin
informationtheory,its applications to economic data
have been fairlyrecent. For example, its application to
the input-outputanalysis was firstsuggestedby Skolka
(5.10) [100]. Applicationsto the Dutch input-outputdata were
made [118, 117] in which the degrees of information
losses due to aggregationwere calculated. In particular,
in [117], the reduction in informationcontent due to
(5.11) aggregationwas classifiedinto the portion due to the
heterogeneityof the input structure,the portiondue to
the heterogeneity ofthe outputstructure,and the portion
(5.12) due to the cell effect.These effectsare noted to be sig-
nificantlystable over the period of study, 1949-60. Also,
Lev [66] applied the entropymeasure to the evaluation
of the informationloss due to aggregationof accounts in
financialstatements.
The two kinds of measures,the linear aggregationco-
(5.13) efficientand the entropymeasure,were foundto be spe-
cial cases of a more general measure of consistencyin
linear aggregations.In [15], such a general measure is
introducedby a generalizedmean. A generalizedmean of
elementsin a vector b using a as weightsis definedas
M,(b,a) = (2 aibir/ ai)lIr (5.15)
wherea is a non-negativeand non-zerovector and r is a
non-zeroscalar. For r=0, Mo(b, a) is definedas37
Mo(b,a) = lim Mr(b,a)
r Jr?
(5.16)
= exp((2 ai log bi)/2 ai)
Using Mr(b, a), a generalized aggregation measure ar
betweena functiony = aTx and w = bTxis definedas
ar (Mr(b,a) .Mr(a, b))/(Mr(a, a) .Mr(b, b)) (5.17)
(5.14)
equal to a, and exp(-Iba - lab) where Iba is definedin
80See [35] fora quadratic approximationto the entropymeasure.
87 See, forexample, [11].
38 The transformation exp( -Iba- Iab) may be interpreted
as a way of makingthe
entropymeasure(1) symmetricalwithrespectto the two probabilityvectorse a and
778
5.4 SelectionMethods
Afterhavingchosen evaluation criteria,the nextprob-
lem is to finda methodof selectingthe best aggregation
under given micro-and macrosystems.
W. D. Fisher [31] (see also [32, 33, 35]) consideredthis
a groupingproblem:Given a set of n elements,each with
a given numerical measure ai and a given weight
wi(i= 1, 2, * , n), find a systematic and practical
procedure for partitioningn elements into m subsets
(m<n) such that
d = ,Liwi(ai - ai)2
is minimized,where ai is the weightedarithmeticmean
ofaj's forall j such that i and j belongto the same subset.
Such a partitionis called the least-squarepartition.This
presentsa combinatorialproblemwhich may be solved
by a computerifn is not too large. However, fora larger
n some systematicmethodsmustbe developedwhichwill
lead to the optimumor near optimumsolution without
exhausting all combinations.
The methodadopted by Fisheris called the progressive
mergermethod,which selects, at each step, an optimal
pair ofelementswhichminimizedthe cost giventhat two
elementsmustbe mergedand thencreatesa new problem
forthe nextstep aftermergingthe selected pair untilthe
required number of subsets is reached. The computa-
tional results on some examples using this method are
reportedin [31].
It is also applied to the linear system (5.6). There,
each columnofB and DT in (5.12) can have one and only
one positive element. The question of an optimal par-
titionis then raised. We seek to place positive elements
in B and D (or to partitionA row-wiseand column-wise) 6.2 Criticism
so as to minimizethe quadratic loss c in (5.11), assuming
that G is selectedoptimallyonce B and D are determined. articlesthat criticizethe approaches in dealing with ag-
The progressivemergermethod is also applied to this gregationdiscussedin thisarticle.
case in [35] (see also [34]).39
6. SUMMARYAND CONCLUSIONS
6.1 Summary
Startingwith a definitionof total consistencyforthe
mostgeneralrelationalsystems,we have consideredhow
the definitionmay be transformedinto more specific
conditionsas the micro-and macrosystemstake on more
specificforms.We analyzed this for general functions,
differentiable functions(noting functionalseparability), whereasits "reduced" systemis given by
and linear systems.Applications of total consistencyto
some economic models were then considered.
Since the conditionsof total consistencyare generally Here, Prrand Prare given by using the submatricesof
verystringent, we reviewedalternativeways ofanalyzing
the aggregationstructureby partial consistency.Three
of theAmerican
Journal Statistical December1971
Association,
types of partial consistencywere explained. Constrained
consistencydeals with consistencybetween the micro-
system and the macrosystemonly for values of micro-
variables satisfyingcertain conditions,e.g., equilibrium
conditions, linear subspace conditions, etc. Filtered
consistencyhas been developed based on the fact that
the identificationof the values of dependent variables
may only be a means to achieve objectives such as deci-
sions. Consistencyis, therefore, argued not on the values
of dependent variables but rather on the values of
variableswhichare derivedfromthe dependentvariables
(5.18) using,say, a decisionfunctionas a filter.Finally,charac-
teristicconsistencydeals with the question of whether
certain characteristics(e.g., profitmaximization)in the
microsystemare carried to the macrosystemunder an
aggregationfunction.Various tests in the index number
theorywerealso reviewedin thisconnection.
While the total or partial consistencyissue is raised by
fixingtwo of the threeparts in an aggregationstructure,
namely the microsystem,the macrosystem and the
aggregation function,we may consider the degree of
discrepanciesin the aggregationstructurewhen all three
parts are fixed.This is done by making the aggregation
errorsand biases explicitfor a given aggregationstruc-
ture. Such aggregationerrorsand biases for linear sys-
tems, static and dynamic,were then reviewed.
Finally, the methodsof evaluating aggregationerrors
and biases and of selectingthe best aggregationfunction
were considered. In particular,the squared-errormea-
sure and the entropymeasure were discussed as well as
the method of selecting the best aggregationfunction
undera quadratic loss function.
of Aggregation
Beforeconcluding,it is perhapsin orderto reviewa few
As an alternativeapproach to aggregationsin input-
outputsystems,Leontief[651proposesa double-inversion
method by which the input-outputsystemfor a subset
of sectors in the original system may be prepared.
Namely, if the sectors are divided into two groups,the
originalsystemis given by
[ZB] [Psr Ps: (X;) + = (6.1) I [2;]
(6.2)
X= PrXr + VAr.
(I U
- P)-l =[ 11 812]
~~S21 S22-

b, (2) increasingas the aggregationerroris reduced,and (3) its value boundedby 0 as follows:
and 1 with 1 meaningtotal consistency.
39The literatureon clusteringis primarilyconcernedwiththe same issue on the Prr-=I -S- = P11 + P12(I -P22)'1P21 (6.3)
selectionmethodsforaggregations,For an extensivetreatmenton the subject of
clustering,see, forexample, [101]. V,= Vr + S-11iSi2v,. (6.4)
 QueriesinAggregation
Fundamental Theory 779
Then, (6.2) is an exactreductionof (6.1) sinceforany notbecauseitsvariablesareincorrect aggregates ofmicro-
variablesbutbecauseitincludes someirrelevant variables,
[rp1
excludessome relevantones and incorrectly postulates
how thesevariablesbehave. This argumentessentially
xrinthesolution using(6.1) is exactlyequaltoxrobtained leadsto thepositionthatthemacrosystem muststandon
from(6.2).40 its own feet and a comparison between the macrosystem
Comparedwitha normalaggregation procedure, this and the microsystem is meaningless.
approachfocuseson a fewselectedsectorsand eliminates As shownin thenextsubsection, however,thefunda-
the remainingsectors.Aggregationerrorsare then mental problem in aggregation does not depend on
avoidedbyredefining variablesin a simplified system(in whether the macrosystem is derived from the micro-
theabove case finaldemand)in sucha waythattheag- system, but on whether the values of aggregated de-
gregationstructure is totallyconsistent underthe new pendent variables can be derived consistently by two
definitionofthevariables. different methods.To stay solelyin the macrosystem,
Grunfeldand Griliches[45] compareda regression avoiding a comparison withanothersystem,is simplyto
analysisbasedonmicrovariables anda regression analysis avoid the aggregation issues altogether.
based on macrovariables whichare derivedas a simple
sumofthecorresponding microvariables. The expenditure6.3 Conclusions
on plant,equipment, and maintenance (ye)is relatedto In defining theaggregation structure in themostgen-
thestockofplantand equipment at thebeginning ofthe eral way using relational systems, it was emphasized that
year(xi') and themarketvalue ofthefirmat thebegin- the order of a microrelation neednotbe greaterthanthe
ningoftheyear(x,2),i identifying thefirm.Eightlarge orderofthecorresponding macrorelation. We have used
Americancompaniesare selected.Aggregated variables theterms,micro-and macrosystem, simplybecausethey
xi, x2, and y are definedas the sum of correspondingare mostcommonin aggregation literature. They may
eightnumbers.The variabley is thenestimatedin two be called simplyan A systemand a B system.In con-
ways: (1) 9=29 where9i is based on microregressions nectinga systemwithanothersystem,the aggregation
usingxi' and x,2;and (2) YcwhereYcis basedon a macro- function cannotcreatesomething whichdoesnotexistin
regression usingxl and x2. A compositecoefficient of the originalsystem41 and can onlylead to information
determination Rf2forthefirstmethodis definedas loss unless the function is 1-1. This is trueregardless
ofwhether thefunction is aggregating or disaggregating.
Rf2= 1 - (S2/SV2) (6.5) The fundamental queryraisedin aggregation theory,
whereS,2 is thevarianceofy and S"2 is thevarianceof therefore, is essentially this: How should we reconcile the
e-2=(y;-9i). Since the multiplecorrelation coefficientcontradictory predictions on the same factor based on
Rf2forthesecondmethodis two different theories, each ofwhich, if taken individually,
appearsto be "correct?" Usingthediagramin (2.7) and
Ra2 = 1 - (Sa2/S,2) (6.6) theequationin (2.9), y maybe set equal to t(O(x)) or to
h(g(x)) based on the same x but different theories.If
whereS2 is the variance of e= y-Yc, we have from(6.5)
VI(4(x)) oh(f(x)), whichoneshouldwe choose?Can there
and (6.6),
be two 'correct"theorieswhich yield contradictory
(1 - R2)/( - Ra2) = 82/S2 (6.7) results?
In a sense,thisis a case ofover-identification.42 With-
For the 20 years data they analyzed,Rf2=.906 and out aggregation, the microsystem and the macrosystem
Rf2=.926 (R2forindividualfirms are all in therangeof were both in a peacefulstate of beingjust identified
.142-.919), whichshowsthattheuse ofaggregated data (assumingthat over-identifiability has been eliminated
improved theregression. The authorsdescribethisresult ineachsystembysomestandardtechniques). Nowaggre-
as due to the intercorrelation amongthe independent gationhasprovideda bridgebetweenthetwoandcreated
variables,and concludethat the aggregatedequation a floodof 'immigration"and reconciliation problems.
may explainthe aggregated data betterthan all micro- Some conceptsmustbe bent,somemeasurements must
equationscombinedif the microequations are not "per- be changed,some must be discarded,some must be
fect."2 created.
Anotherattackon thesupremacy ofthe microsystem
Such an evolutionary processis essentialto scientific
camefromPeston[87],whoarguesthatthereis no magic theories.For this issuesshouldbe
reason,aggregation
in the microtheory, whichis oftenconsideredto be a
resolved,not discarded.As mentioned at the beginning
basis forconstructing a macrotheory, and that micro-
ofthisarticle,theaggregation issuescan be raisedon any
variablescan be madea function ofmacrovariables. If a
macroequation is foundto be invalid,Pestonsays,it is 41 See Leontief's [62] argumentthat index numbersare only meaningful
to the
extentthat it is greaterthan,equal to, or less than 1, sincethe originalsystemfrom
whichindexnumbersare computedis notrichenoughto allow any further numeric,l
40 Compare this with an approximat&on approach in [39] wherethe effectsof interpretation.
aetors not in the groupare reflectedinPrrand not ina'. threechaptersin [98] on identification
42 See, forexample,the first and causality.
780 Statistical
of theAmerican
Journal December1971
Association,
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[20] Divisia, F., EconomiqueRationnelle,Paris: Doin, 1928,
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