Accelerator :

In the study of multiplier, we have seen how a change in investment leads to a change in
income. The principle of Accelerator shows the effects of a change in consumption on investment.
The multiplier shows the dependence of consumption on investment, where as the accelerator shows
the dependence of investment on consumption. Thus accelerator is a macro economic analytical tool
that measures the effect of an increment in the rate of consumption on the volume of investment. It
expresses the ratio of net change in consumption to the net change in investment.
The principle of Acceleration is associated with the name of Prof. J.M. Clark an American
economist. The principle of acceleration is based on the fact that the demand for capital goods is
derived from the demand for consumer goods which the former helps to produce. The acceleration
principle explain the process by which an increase in the demand for consumer goods leads to an
increase in investment on capital goods. It is ratio between induced investment and change in

ΔI
consumption. Symbolically β =
ΔC
or ΔI = βΔC where β is the accelerator coefficient, ΔI is the net change in investment and ΔC is the
net change in consumption. For example an increase in consumption expenditure of Rs 10 crores leads
to an increase in investment of Rs 30 crores, the accelerator coefficient is 3. But the accelerator in
Economics is not to be confused with the accelerator in a motor car. In the case of car, the accelerator
makes it run faster and ever faster. That is not the case with investment in business. It does not
increase faster and ever faster, the down ward trend also appears after some time. The accelerator in
economics express only a functional relationship between consumption demand and investment
demand, i.e the demand for machines which makes the consumer goods, It makes the level of
investment is function not of the level of consumption, but of the rate of change of consumption. The
level of investment is a function of the rate of change in level of income. “This expression of
acceleration maintains the hypothesis that a fluctuation in the independent variable will give rise to a
greater fluctuation” in the dependent variable. The Economics of cycles and growth.

6.8 Working of Accelerator :

An illustration will make clear the working of the accelerator. Suppose to produce cloth worth
300
Rs 100, require on machine worth Rs 300, which means the value of accelerator is = 3.(i.e
100
capital out put ratio as 1.3). If the demand rises to by 100 rupees, additional investment worth 300
rupees takes place. If the existing level of demand for cloth remains constant, let us say, at 500
rupees then to produce this much of cloth we need 5 machines worth Rs 1500. At the end of one
year, let us suppose one machine becomes useless as a result of wear and tear, so that at the end of
one year a gross investment of Rs 300 must take place to replace the old machine in order that the
stock of capital is capable of producing output worth 500 rupees. In the third period, demand rises
to 800 rupees. To produce output worth 800 rupees, we need 8 machines. But our previous stock
consisted of only 5 machines. Thus if we are to produce output worth of Rs 800, we must instal 3
new machines, worth Rs 900. In addition, since at the end of one period, one old machine has
become useless, even to maintain previous stock of machines, we need one new machine to replace
of the old one. Thus net investment will be 900 rupees and replacement investment Rs 300, so that
our gross investment rises from 300 rupees in period 2 to Rs. 1200 in period 3. A 60% rise in
demand gives rise to 400 percent increase in gross investment. In the fourth period, demand rises
from Rs 800 to Rs 1000 (25%) but gross investment is only Rs 900 which Is 25% less than the
previous period. In the fifth period, even though demand remains constant, gross investment falls to
Rs 300 which is 33.3% of the forth period, while net investment falls to zero. Thus is order to keep
the economy prosperous. mere standing still or running at a slow pace in no good. In the above
table, we see that when out put or income becomes stabilised round the peak (period 4 and 5) the
pressure for the decline becomes more intense, because a half in the increase in out put means an
accelerated contraction in investment spending. There is no gross investment at all in period 6,
which means that relative to the lower level of output the system is still in excess capacity. The wear
and tear of equipment is a technical process and is divorced from the rate of economic contraction.
The decline in investment expenditure can not go beyond zero investment. Thus the table reveals
that net investment depends on the change in

total out put, given the value of accelerator. So long as the demand for final goods rises, net
investment is positive. But when it falls net investment is negative. The following table shows the
working of accelerator.
Table - II

Demand for Needed Replacemen Net investment Gross

cloth in stock of t investment
rupees capital expenditure investment
Period 1 500 5 machine 1 machine 0 300 rupees
=1500 rupees 300 rupees
Period 2 500 5 machine 1 machine 0 300 rupees
=1500 rupees 300 rupees
Period 3 800 8 machine 1 machine 3 machines 1200 rupees
=2400 rupees 300 rupees = 900 rupess
Period 4 1000 10 machine 1 machine 2 machines 900 rupees
=300 rupees 300 rupees = 600 rupees
Period 5 1000 10 machine 1 machine 0 machines 300 rupees
=3000 rupees 300 rupees
Period 6 800 8 machine 1 machine 2 machine –300 rupees
=2400 rupees 300 rupees = 600 rupees

6.8.1 Assumptions : It seems that the explanation of fluctuations in the capital goods
industries provided by the principle of acceleration is too good to be realistic. The assumptions on
which it is based are too rigid and do not hold good in real life. If increase in demand for
consumption goods led to much more than proportionate increase in the capital goods, fluctuations
in the capital goods industries would be much larger than they actually are, we have assumed great
inflexibility of out put in the consumer goods industries and great flexibility in capital goods
industries. The following assumptions are made in the discussion of the accelerator make it
unrealistic.
1. It is assumed that there is no excess capacity in consumer goods industries, that means
no machines are lying idle and shift working is not possible. It there had been excess
capacity and shift working was possible, the supply of goods could be increases with the
existing equipment and the accelerator would not come into play.
2. The accelerator principle assumes a constant capital output ratio.
3. It is also assumed that the increase in demand is permanent.
4. There is elastic supply of capital credit.
5. It further assumes that the increase in output immediately leads to a rise in net investment.
6.8.2 : The super multiplies or leverage effect : In order to measure the effect of initial
investment on income Hicks has combined the multiplier and the accelerator mathematically and
given it the name of super multiplier. The combined effect of the multiplier and accelerator is also
called the leverage effect which may lead the economy to very high or low level of income
propagation. As investment expenditure increase the income and consumption levels will rise.
Consumption expenditure thus leading to an increase in investment once again. Investment
expenditure increases, thus leading to a further rise in the levels of income and consumption. Like
this all the variables go on increasing one after other. This combined effect of multiplier and
accelerator called as super multiplier.
ΔC

The super multiplier is worked out by combining both induced consumption (i.e or MPC) and
ΔY

ΔI
1 1
induced investment i.e or MPI.) Kg
=
ΔY
1−c − v= s−v

Where Ks is the super multiplier, ‘c’ is marginal propencity to consume, ‘v’ is the marginal
propencity to invest and ‘s’ is the marginal propencity to save. Let us explain the combined effect of
multiplier and accelerator with the help of the formula or equation. Suppose C = 0.5 and V = 0.4
and autonomous investment increases by Rs 100 crores. The increase in income will be

1 =
Δy = x 100
1 − 0.5 − 0.4
 1 x 100 = 10 x 100 = 1000
0.1

It shows that a rise in autonomous investment by Rs 100 crores has raised income to Rs 1000
crores. The simple multiplier would have raised income to only Rs 200 crores, given the value of
K1 the multiplier as 2. (since MPC = o.5) But the multiplier combined with the accelerator (Ks =
10) has raised income to Rs 1000 crores which is higher than generated by the simple multiplier.
Table II explains how the process of income generation via the multiplier and accelerator with the
value of super multiplies Ks = 10 leads to a rise in income to Rs 1000 crores with an initial
investment of Rs 100 crores.
TABLE - III

Period initial Induced Induced increase Total

(t) (e) investme consumpto investme in income in
nt n nt Income Income
C = 0.5 V = 0.4 ΔY = C + V
(1) (2) (3) (4) (5) (6)

t=0 0 0 0 0 0
t+1 100 – – 100 100
t+2 100 50 40 90 190
t+3 100 45 36 81 271
t+4 100 40.5 32.4 72.9 343.9
t+5 100 36.45 29.16 65.61 409.51

t+n 100 0 0 0 1000

In period t + 1, constant investment of 100 crores is injected into the economy but there is no
immediate induced consumption or investment. In period t + 2, induced consumption of 50 crores
taken place out of the income 100 crores of t +1, since the marginal propensity to consume is 0.5,
while there is an induced. Table II explain how the process of income generation Via the multiplier
and the value of accelerator with the value of super multiplier KS = 10
Investment of Rs 40 crores out of 100 crores of income (V being 0.4). The increase in income
from period 1 to 2 is 90 crores. This cumulative process of income propagation continues till in
period t + n, induced consumption, induced investment and increase in income dwindle to zero. If
we add up the increase in consumption, investment and income from period t + 1 to t + n, the total
income increases to Rs 1000 crores, total, total consumption Rs 500 crores and total investment to
Rs 400 crores, given the initial investment of Rs 100 crores. The dynamic path of income is shown
in figure
6.4. Income is measured vertically and time horizontally. The curve OYt shows the time path of
income with a super multiplies of 10. The curve rises with time and reaches the new equilibrium
level of income Y1 and flattens out. It indicates that income increases at a decreasing rate.

Figure - 6.4.
Y

Y1
Income

Time X

Importance of super multiplies time

The concept of super multiplier has a very great practical value in macro economic analysis. It
is a complete and fally explanation of the effects of multiplier and accelerator in their joint
operation. It provides a clear understanding of the problems of trade cycles, especially the turning
points of different stages in trade cycles. It is helpful to the government in formulating its
expenditure policy.
 Criticism of Accelerator : The accelerator principle has been criticised by economists for its
rigid assumptions which tend to limit its smooth working. The following are its limitations.
1. The accelerator principle is based on a constant capital output ratio. But this ratio does
not remain constant in the modern dynamic world. Investment and improvements in
techniques of production constantly taking place which lead to increase in out put per
unit of capital.
2. The accelerator principle assumes the availability of resources. Resources should be
elastic so that they are employed in capital industries to enable them to expand. This is
possible when there is unemployment in the economy. But once the economy reaches
 the full employment level capital good industries face the non availability of sufficient
resources. This limits the working of the accelerator principle.
3. The accelerator principle fails to explain the time lag. If time lag is high the effect of
new investment will not felt immediately.
4. If the firms anticipate future demand, capital equipment has already been installed, it
would not lead to induced investment and the accelerator effect will be zero.
5. The accelerator principle neglects the role of expectations indecision making on the part
of entrepreneurs. The investment decisions are not influenced by demand alone. They
are also effected by future anticipations like stock market changes political
developments, international events, economic climate, etc.
6. The accelerator principle is weak in that it neglects the role of technological factors in
investment. Technical changes may be either capital saving or labour saving. There fore
reduce or increase the volume of investment, as pointed out by prof.knox.
7. The acceleration principle assumes an elastic supply of credit, so that when there is
induced investment as a result of induced consumption, cheap credit is easily available
for investment in capital goods industries. If cheap credit is not available in sufficient
quantities, the rate of interest is high and investment will be low. Thus acceleration will
not work fully.
Despite these limitations, the principle of acceleration makes the process of income
propagation clearer and more realistic than the multiplier theory. The multiplier shows the effect of
a change in investment on income via consumption, while the acceleration shows the effect of
consumption or output on investment and income. Thus acceleration principle explains the volatile
fluctuations in income and employment as a result of fluctuations in capital goods industries. It can
explain the upper turning points better than the lower turning points.