ACCELERATOR

Introduction, Multiplier vs. Accelerator, Meaning of Accelerator, Rationale, Induced Demand, Implications, Limitations, Multiplier & Accelerator distinguished & Leverage Effect.

Introduction
The principle of acceleration of derived

demand.
Multiplier

and accelerator are parallel

concepts.
But accelerator and multiplier principles

explain opposite effects.

Multiplier
Effect of investment on aggregate income

through consumption.

Dependence of consumption and income

on investment.

Accelerator
Effect

of change in consumption on investment. of investment on

Dependence

consumption.
When income or consumption increases

investment will increase by a multiple amount.

Definition of Accelerator
It measures the effect of an increment or decrease in the rate of consumption on the volume of investment.
It is the ratio of the net change in investment to the net change in consumption. It is the numerical value of the relation between the increase in investment due to an increase in aggregate income I / Y.

Rationale of the Accelerator

Increasing income and consumption requires

increasing amounts of commodities have to be produced.

Increasing need for machinery and capital assets. A

derive demand increasing demand for consumption goods leads to increasing demand for capital goods. industry is due to augmented income and demand in the consumer goods industry.

Changes in investment in the capital goods

Induced Demand
Augmented demand in consumer goods industry

induces investment in capital goods industries.

Accelerator measures changes in investment

induced by augmented consumer goods demand.

Net

induced investment positive if national income increases.

Net induced investment zero if national income

remains constant.

Inference - 1

Increase in demand for consumption goods in the economy generally leads to an accelerated demand for investment goods.

Implications
Helps

to understand process of income generation in a clearer and a more scientific manner. explains one part and accelerator explains the other part of increase in income.

Multiplier

Explains why business fluctuations is more acute

in investment goods industries than in consumer goods industries.

Limitations of the Accelerator - 1

No resultant new investment in capital

goods industry in case of existent excess or idle machinery.

Assumes existence of surplus capacity in

investment goods industries.

Producers of consumer goods should not

feel that the rise in demand for their goods is only temporary.

Limitations of Accelerator - 2
All investments need not wait for changes in the

rate of consumption.
Work of accelerator difficult if real and monetary

resources for investment good industries are not easily available.

Assumes

constant ratio between output of consumer goods and investment goods which is not always constant due to improved production methods or intensive factor use or change in entrepreneurial expectations.

Multiplier Accelerator Distinguished

1.

Multiplier Effect of change in investment on income & employment. Consumption dependant on investment. Depend on marginal propensity to consumer. Depends upon psychological factors.

1.

Accelerator Effect of change consumption investment.

in on

2.

2.

Investment dependant on consumption. Depends on the durability of machines. Depends upon technological factors.

3.

3.

4.

4.

Multiplier Accelerator Interaction -1

Prof. Hansen combines the working of the

multiplier and accelerator thereby showing the mutual relation between investment and consumption.
Two effects of growth in primary or

autonomous investment: (a) higher employment and income; (b) higher demand for articles of personal consumption (the Multiplier).

Multiplier Accelerator Interaction -2

Subsequent increase in investment to satisfy rise

in demand for consumer goods (the Accelerator).

Induced investment activates the multiplier leads

to increase in employment and income which in turn induces new investment LEVERAGE EFFECT.
Reason for combining multiplier accelerator

principle is to demonstrate mutual dependence of investment and consumption in a full manner.