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Aggregation Problem

In economics, an aggregate is a summary measure that describes an economy or a particular market. The aggregation problem therefore refers to the problems or difficulties of treating a practical or hypothetical aggregate as if it responded like a less-aggregated measure. In other words, aggregation problem is the problem of merging microeconomic variables and the responses of microeconomic agents into macroeconomic aggregates like inflation, gross domestic product, unemployment to name but a few, particular circumstances. Some examples of aggregates in microeconomics and macroeconomics in relation to their less aggregated counterparts include:

- The supply of money vs. Paper currency

- The overall unemployment rate vs. the unemployment rate of civil engineers

- The capital stock for the economy vs. the actual value of steam shovels and that of computers of a particular type

- Food vs. apples

- Real GDP and price level vs. the quantity and price of apples


The normal theory utilizes straightforward assumptions to come up with general, and generally accepted results like the law of demand as used to explain how the market behaves or the trend of the market at a particular time. Aggregation problem puts much emphasis on:

- How such broad restrictions are found in microeconomics

- The use of broad factor inputs (capital and labor), investment, and real output in that if there was just one such aggregate and lack a firm foundation for thoroughly deriving usable analytical findings.

A perfect example is the concept of a composite good which puts into consideration the price of a single good changing in proportion to the composite goods, in this case, all the other goods. In case such an assumption is desecrated and all the agents become subjected to aggregated utility roles, it would be essential to put limits on the latter for the whole concept to give way for the law of demand.

Still on point, in a perfect economy, different wage rates are experienced for different laborers. The demand and supply curves for each producer and consumer will have to be aggregated to the industry’s supply and demand curve and subsequently the aggregate consumption/demand be calculated. How is a nation able to calculate an individual’s income to get the national income? It’s normally never a case of summing up individual figures or coming up with a weighted aggregate. These are few of the aggregation problems in macro-economics.

Economy in general deals with the level of problems arising at various different levels. There are problems arising at an individual level in an economy, those arising at a company/firm level and those arising at a community level – hence a broad distinction has to be drawn between these levels. Both macro and micro economics deal with aggregates whereby the microeconomic theory depicts the behavior of both individual firms and industries. The rate of demand for a certain product or good generally involves the aggregation of demand for that particular good over individuals or consumers. Macroeconomics will use an aggregate very minute compared to the entire economy to describe how the whole economy behaves.

Tags: Economics, Income, law, market, money, price

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