Aggregation

Published Jul 31, 2023

Definition of Aggregation

Aggregation in economics refers to the process of combining individual economic variables into a larger, more comprehensive measure. This concept acknowledges the fact that many individual economic behaviors can only be analyzed in the context of their overall influence on the economy, as opposed to looking at them in isolation.

Example

To illustrate aggregation, consider a business that sells candy. The business owner, Rose, is interested in knowing the total quantity of candy her shop sells in a year. She starts by keeping track of how many candy bars, chocolate boxes, and gummy bears her shop sells each day. She does this for many months and then aggregates the data by adding up the total quantity of candy sold over the entire year.

Another example is the Gross Domestic Product (GDP). GDP is a measure of an economy’s total economic output, including goods and services. To calculate GDP, economists aggregate the value of every transaction in the economy over a certain period of time. This measure provides a comprehensive and overarching view of the economy’s performance.

Why Aggregation Matters

Aggregation is essential in economics because it allows economists to analyze how individual variables combine to shape the overall performance of an economy. Analyzing isolated economic variables cannot reveal much about the economy’s overall health or predict its future performance. Hence, aggregation is necessary to generate a comprehensive understanding of an economy’s behavior. It also helps businesses and policymakers to make more informed decisions by providing a holistic perspective on economic performance.