Proceedings of The 5th International Conference on Business, Management and Finance
Weighting by Relative Population to Measure Inequality between Regions: Conceptual Inconsistencies
Kireyna Aurelia Santoso
Studies that compare economic growth rates between a country’s regions have widely used population-weighted indices, whereby a region’s GDP per capita growth rate is weighted based on the region’s share of the national population. These populations weighted indices are often utilized to draw conclusions about an average region’s real income growth in a particular country, as well as income inequality between the country’s regions. This paper builds on Konstantin Gluschenko’s (2017) proof that population-weighted growth indices are biased when the subject of the study is regional inequality. In lieu, population-weighted indices of income growth estimate inequality between all individuals within a country, not inequality between all regions in a country. Albeit not readily apparent, such conceptual distinction is crucial to identify and understand in interpreting inequality within a country. Yet, this conceptual inconsistency is often overlooked in the literature. The elaboration of econometric proof and intuition behind such conceptual inconsistency in the coefficient of variation of incomes are provided in this paper. Additionally, negative implications of using the population weighted approach to estimate interregional inequality are examined, by selecting a number of case studies. This paper then suggests how the selected studies ought to interpret inequality when using relative population as weights.
keywords: interregional inequality, population-weighted indices.