ACCELERATOR

CONCEPT OF ACCELERATOR

 In economics, the concept of an "accelerator" refers to the relationship between changes in the level of
economic activity or output and the corresponding changes in the level of investment. The accelerator
theory is primarily used to explain fluctuations in business investment over the business cycle.

 The accelerator principle posits that the level of investment is influenced by the rate of change in the
level of economic output or income. According to this theory, when there is an increase in the rate of
economic growth or output, businesses are more likely to invest in new capital goods and expand their
production capacity. Conversely, during periods of economic downturns or negative growth, businesses
are likely to reduce their investment, leading to a decline in the overall level of economic activity.

 The accelerator effect works through the relationship between the current level of output and the
desired level of capital stock. If the actual output is greater than the desired level, businesses may slow
down their investment. On the other hand, if the actual output falls below the desired level, businesses
may increase their investment to bridge the gap and meet the demand.

 The accelerator effect is often associated with the multiplier effect, which explains how changes in
spending can have a magnified impact on the overall economy. When businesses increase investment
due to positive economic conditions, it not only boosts their own output but also creates a ripple effect
throughout the economy as increased production leads to higher incomes and, in turn, increased
consumer spending.
 Accelerator theory of Investment
• This theory was first introduced by J.M. Clerk in 1917. later on economist like J.R. Hicks, P.A. Samuelson and R.F. Harrod
further developed this principle to explain business cycle. This theory of investment explain the effect of induced
consumption on investment. The theory is based on the fact that the demand for capital goods is derived from the demand
for consumer goods. According to K. K. kurihara, “ the acceleration coefficient is the relation between induced investment
and an initial change in consumption”
• the principle of acceleration coefficient is the numerical value of relation between the increase in investment resulting from
the increase in consumption. The acceleration principle explains the process by which change in demand for consumer
goods leads to change in investment on capital goods. In symbol, v = ∆I/ ∆C………………………………………………………..(1)
⸫ ∆I = V x ∆C where, ∆I = Net change in investment ∆C = Net change in consumption and V = coefficient of
acceleration principle
• According to J. R. Hicks, it is the ratio of change in induced investment and change in income or output.
• Thus in symbol,
• V = ∆I / ∆ Y ……………………………..(2) where, ∆I = Net change in induced investment ∆ Y = Net change in income or
output.
• This ratio implies that the coefficient of acceleration principle is capital output ratio.
ASSUMPTIONS
1. There is constant capital output ratio
2. There is no excess production capacity
3. Factors of production are homogeneous and perfectly divisible
4. There is no financial constraint and funds are easily available
5. Firms produce with the least cost combination of inputs
6. Technology remains constant . There is absence of time lag.
7. Factor market is competitive and factor prices are given
8. Firm’s demand forecasting is accurate.
Accelerator theory of Investment

 Equational Model
 The theory can be explained with the help of following linear equation model
 Igt = V ( Yt – Yt-1) + R OR Igt = V ∆Y + R ……………………………………………………(3)
Where Igt = Gross Investment during period ‘t’
Yt = output during period ‘t’
Yt-1 = output during period ( t-1 )
∆Y = change in output
V = coefficient of accelerator
R = Replacement investment
This equation 3 shows that gross investment during period ‘t’ depends upon the change in output ∆Y multiplied by
coefficient of acceleration plus replacement investment R. To know net investment (Int ), R must be deducted from
the gross investment. Hence,
Int= V ( Yt – Yt-1)
OR ∆I = V ∆Y
⸫ V = ∆I / ∆Y …………………………………………….(4)
Thus it is clear that gross investment is equal to net investment plus replacement investment. Assuming
replacement investment to be constant, gross investment varies with the level of net investment.
Formula to solve numerical problem on APC MPC , Equilibrium
National Income and level of Income, consumption and saving
1. APC = C/Y Where C = aggregate/ total consumption expenditure Y = national / total income APC =
Average Propensity to consume

2. MPC = ∆C / ∆Y where, ∆C = change in consumption (∆C = MPC X ∆Y) ∆Y = change in income(∆Y

3. S = Y – C where, S = saving Y = Total income C = consumption

4. Equilibrium National Income ( Y ) = C + I where, I = Investment expenditure

5. APS = S / Y where S = Saving Y = Income and APS = Average Propensity to Save

6. MPS = ∆S / ∆Y where, ∆S = change in saving ∆Y = Change in Income

7. Current year consumption / New consumption { Ct } = Ct-1 + ∆C OR = Ct-1 + MPC x ∆Y

8. Last year consumption/ old consumption (Ct-1)= Ct – MPC x ∆Y

Using these formula and observing book example solve the numerical problem related to APC MPC APS MPS
and equilibrium of National income { page no.168 to 170 )