The simple definition of aggregate is sum or total. In economics, it is used to characterize the sum of a given economic variable. Associating economic relationships at the micro to aggregate levels is often called aggregation.
Aggregate Economic Variables
Aggregate economic variables are the total values of these variables for the economy as a whole. Examples of aggregate economic variables include national income, gross domestic product (GDP), consumer price index (CPI), and international trade deficit.
The relationship between micro and macroeconomics has never been stronger than it is today. The behavior of individual economic agents is referred to as the micro level.
The macro level refers to the relationships between totals, averages, and other economic aggregates across the economy.
Aggregation can be defined as the process of deriving the characteristics of a large or complicated thing from the properties of its parts.
The aggregation process involves bringing together details that had been separated, as in statistical surveys. Aggregation is used on both macro and micro-level economic models.
Analysis can be made based on a small unit like consumption analysis, production analysis, etc. Microeconomics studies individual markets such as the market for apples, the market for cars, etc.
It analyzes the behavior of producers, consumers, and other economic agents, which are generally represented in the form of households or firms.
Microeconomics provides views about how an individual market works. Microeconomics has five topics to study. They are:
- Production theory
- Consumption theory
- Market structure and pricing
- The economics of information
- Game theory
At this level, we study the economy as a whole or in Aggregate. It gives information about the economy’s performance.
Macroeconomics analyzes the economy by looking at the large picture of how it works. Macroeconomics has five topics, which are:
- National income and output,
- Money supply and inflation,
- What causes unemployment and what can be done about it,
- How a country’s business cycle and international trade affect each other, and
- Fiscal policy.
The analysis of macroeconomic aggregates is called the aggregate production function, the aggregate consumption function, etc.
What is Macroeconomics?
Macroeconomics is the branch of economics that analyzes the mechanisms and issues of the system in general.
It is related to aggregate supply (gross domestic production of goods and services) and aggregate demand (the total expenditure of the entire system) and matters, e.g., economic growth, inflation, unemployment, and economic fluctuations.
Thus, economic policy suggestions tend to concentrate on this difference between aggregate demand and supply.
Multiple demands and aggregate supply do not usually go neatly collectively. Aggregate demand may change to increase along with multiple supplies, or aggregate demand may still change led.
For several reasons: Households become uncertain about consuming; firms make against investing more, or maybe the demand from different countries for exports decreases.
Sector cycles of recession and improvement represent the result of shifts in aggregate supply and aggregate demand.
Demand line policies try to determine the level of payment in the economy. This, in turn, indirectly impacts the level of output, costs, and business. Supply-side terms are designed to affect the industry immediately!
A macroeconomic concept known as “aggregate demand” refers to the total demand for products and services at any given price level during a specific time period.
Since the two indicators are calculated similarly, aggregate demand is equal to GDP over the long run.
Aggregate demand is the desire or demand for those products, whereas GDP is the total amount of goods and services produced in an economy.
As a result of using the same calculation techniques, changes in aggregate demand and GDP are coordinated.
Technically, aggregate demand only matches GDP over the long run if the price level is considered.
This is because short-run aggregate demand evaluates all production at a single nominal price level, where nominal is not inflation-adjusted.
Effects on Aggregate Demand
Income and Wealth
A general rule is that household wealth rises, so makes aggregate demand. On the other hand, a reduction in wealth typically results in a decrease in aggregate demand.
Personal savings increases will also reduce the need for goods, typically during recessions. When people are optimistic about the economy, they tend to spend more, which reduces their savings.
Expectations of Inflation
People are more likely to make purchases now if they anticipate rising prices or inflation, which increases aggregate demand.
However, aggregate demand typically decreases if consumers think prices will go down in the future.
Whether or not interest rates are growing or lowering will impact the choices that individuals and businesses make.
Decreased interest rates will lower financing expenses for expensive items like appliances, cars, and homes.
Furthermore, businesses can borrow money at reduced interest rates, which increases capital expenditure.
On the other hand, higher interest rates raise borrowing costs for businesses and individuals.
Consequently, depending on the rate hike’s magnitude, expenditure tends to either decrease or grow more slowly.
Foreign items will cost more or less depending on how much the U.S. currency appreciates or depreciates (or is less expensive).
Products made in the United States will change prices for international markets, either going down or up. So, there will be a rise in total demand (or decrease).
Disadvantages of Aggregate Demand
Although it has limitations, aggregate demand can help assess the general health of consumers and businesses in an economy.
Since market values determine aggregate demand, it indicates total output at a certain price level and is not always indicative of a society’s standard of living or quality of life.
Additionally, aggregate demand tracks various economic activities between millions of people and for various goals.
Due to this, it may be challenging to establish the cause of demand and do a regression analysis. Which demonstrates how many variables or factors affect demand and to what degree.
The whole supply of products and services produced within an economy at a specific overall price over a particular period is called aggregate supply, generally called total output.
The aggregate supply curve depicts the relationship between price levels and the amount of output that businesses are prepared to produce.
Usually, the level of prices and total supply have a positive connection. Rising prices often indicate that firms must increase production to keep up with rising total demand.
Consumers battle for the available commodities and pay more when demand rises in the face of steady supply.
Due to this dynamic, businesses boost output to increase sales. Prices normalize as a result of the increased supply, while output stays high.
Effects on Aggregate Supply
Greater utilization of existing inputs in the production process is how to aggregate supply response to rising demand (and prices) in the short term.
The amount of capital is set in the short term, so a business cannot, for instance, build a new plant or implement a new technology to boost production efficiency.
Instead, the business increases supply by making better use of its current factors of production, such as increasing the number of hours employees are given to work or making more use of the available technology.
Productivity is the sum of labor, capital, and multifactor productivity. Increased productivity means that goods and services are produced more efficiently, lowering unit costs of production and increasing aggregate supply.
Material Prices Higher and input prices will raise unit labor costs and reduce aggregate supply. Material prices can also be imported, which is affected by exchange rate fluctuations.
Taxes and other costs – Regulation and taxation costs can burden the unit.
production costs, lowering an economy’s aggregate supply.
Wage Costs – Higher wage costs imply that an economy produces fewer goods and services due to higher production costs.
However, in the long run, aggregate supply is unaffected by price level and is only influenced by increases in productivity and efficiency, unlike in the short term.
These achievements include advances in technology, a rise in the capital, and a rise in the skill and education levels of the labor force.
- The size of the labor force predominantly affects aggregate supply in the long term.
- Productivity affects aggregate supply as a higher level of productivity will result in increases in the supply throughout the short- and long-term.
- The capital available in an economy is known as its stock of capital. The capital stock is the assets that help in production, e.g., plants, equipment, etc.
- The level of Technology plays a significant role. An economy can boost its potential output by adopting new technologies, concepts, and managerial techniques. These changes can also improve resource efficiency, which raises aggregate supply over the long term.