An exact additive decomposition of the weighted arithmetic mean*

Abstract

The weighted arithmetic mean is used in a wide variety of applications. An infinite number of possible decompositions of the weighted mean are available, and it is therefore an open question which of the possible decompositions should be applied. In this paper, we derive a decomposition of the weighted mean that is rooted in functional analysis. Our proposed decomposition is easy to employ and interpret, and we show that it satisfies the difference counterpart to the index number time reversal test. We illustrate the framework by decomposing aggregate earnings growth from 2020Q1 to 2021Q1 in Norway and compare it with some of the main decompositions proposed in the literature. We find that the wedge between the identified compositional effects from the proposed decomposition and the Bennet decomposition is substantial, and for some industries, the compositional effects are of opposite signs.