Aggregation Problem

Abstract

Microeconomic theory elegantly treats the behaviour of optimizing individual agents in a world with an arbitrarily long list of individual commodities and prices. However, the desire to analyse the great aggregates of macro-economics-gross national product, inflation, unemployment, and so forth-leads to theories that treat such aggregates directly. What is the relation of such theory (or empirical work) to the underlying theory of the individual agent. When is it possible to speak of `food' rather than of `apples, bananas, carrots, etc.?' When can one treat the investment decisions of all firms together as though there were a single good called `capital' and all firms were a single firm?