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What is Aggregate Supply?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 05 November 2014
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    Conjecture Corporation
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As the sum of goods and services that are produced within a domestic economy, aggregate supply plays an important role in helping to determine the current strength of the macroeconomics of a given country. There are a couple of factors that go into determining aggregate supply within a given country for a specified period of time. Here is some information on how to arrive at an accurate figure of aggregate supply.

One of the first things to determine in regard to aggregate supply has to do with the actual production of goods and services within the macroeconomic environment under consideration. This will involve determining the value of the goods and services produced between a given start date and end date. All goods and services produced during the time period must be included, in order to be accurate. It is not possible to begin the process of calculating an aggregate supply by choosing certain industries and omitting others that are in operation within the country.

Second, the cost of producing those same goods and services must be taken into account. This will include such line items as the price of raw materials needed for production, upkeep and maintenance of manufacturing facilities, operation of equipment, and the amount of labor involved in producing the finished products. The cost of production is deducted from the fair market value of the produced goods.

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Understanding aggregate supply helps to ascertain the true status of macroeconomic value within a country. A basic component of macroeconomic theory is to allow for the variables associated with the performance of an economy as a whole. Understanding when there is more value for finished goods than it takes to produce the goods is a clear indicator of a healthy economy. Aggregate supply also helps to pinpoint net increases or decreases from one period to the next, allowing the opportunity for the national economy to be altered if the trend appears to be a decrease in that net value.

A basic of all financial accounting is that a healthy financial outlook requires consistently producing more resources than are used in the production of consumer goods. By taking time to calculate the rate of aggregate supply from time to time, it is possible to identify negative trends that threaten the health of a national economy, and take steps to slow or reverse the trend. By doing so, the well-being of both industry and the general populace of the country involved will be served well over the long term.

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