THE ACCELERATOR

(The concept of Accelerator was first propounded by a French economist,

Albert Aftalin. Later it was popularised by an American economist, J.M.Clark in 1917.)

The accelerator shows the effect of a change in consumption on investment.

Symbolically,

a = ;where,

a = accelerator coefficient

ΔI = net change in investment

= net change in consumption expenditure

For example, if change in consumption expenditure (ΔC) is Rs.10 crore and change

in investment (∆I) is Rs.40 crore, then,

a = ΔI / ΔC =40/10

Accelerator coefficient a = 4.

ΔI = a. ΔC or ΔY

(An increase in the income of the people always leads to an increase in the
demand for consumer goods. It creates derived demand for many things, particularly
capital goods. It requires additional investment in capital goods like plant and
machinery. Thus, a rise in income leads to an increase in induced investment.)

Working of Accelerator

Accelerator depends primarily upon two factors:

(i) The capital-output ratio, and

(ii) The durability of the capital equipment.

Let us suppose that production of final goods (consumer goods) worth

Rs.100/- requires capital goods worth Rs.400/- . The life of capital goods is 10 years.
Therefore, 10 percent of the capital goods have to be replaced every year. It can be
illustrated with the help of the following table.

Working of Accelerator (Rs. in crore)

(Capital-
outut
Total Replacement
ΔC ratio=4) Net Gross
Output investment
Period or Required Investment Investment
(Y or (10% of
ΔY Capital ΔI (IG)
C) capital stock)
(Investment)
(I) = a . Y
1 2 3 4 5 6 7=5+6
1 100 - 400 0 40 40
2 100 0 400 0 40 40
3 105 5 420 20 40 60
4 115 10 460 40 40 80
5 130 15 520 60 40 100
6 140 10 560 40 40 80
7 145 5 580 20 40 60
8 140 -5 560 -20 40 20
9 130 -10 520 -40 40 0
10 125 -5 500 -20 40 20
ΔC
Total = ΔI = 100 400 500
25

The table traces changes in total output, capital stock, net investment and
gross investment over ten time periods.

Assuming the value of the accelerator a = 4, the required capital stock in each
period is 4 times the corresponding output of that period.

Thus the net investment depends on the change in total output, given the value
of the accelerator. So long as the demand for final goods (output) rises, net
investment is positive. But when it falls net investment is negative.
 Parallel action of multiplier and accelerator

Increase in autonomous investment

Increase in income

Increase in consumption

Increase in induced investment

Diagrammatic Illustration

Y
S
I1
I
Savings and Investments

P2
I4

P1 I3

P
I2
I
I
O X
S M M1 M2 Income

Multiplier Accelerator
SS = Savings curve
II, II1 = Induced investment curves
II2, II3, II4 = Autonomous investment curves

Increase in income by MM1 - due to multiplier effect

(change in income due to change in autonomous investment)

Increase in income by M1M2 - due to accelerator effect

(change in income due to change in induced investment)
ASSUMPTIONS

The accelerator principle is based on the following assumptions.

1. There is no excess capacity in consumer goods industries.
2. There is excess capacity in capital goods industries.
3. New demand for consumer goods is permanent.
4. Capital – output ratio remains constant.
5. There is no gestation period before new investment is undertaken.
6. Firms are able to get sufficient funds.
7. No increase in demand for consumer goods had been foreseen.
8. There is elasticity in the supply of resources.
9. The industry is in a fluid condition.
Limitations
The concept of accelerator is based on several unrealistic assumptions.
1. Absence of excess capacity in consumer goods industries is not always a reality.
2. We cannot expect existence of unutilized capacity in the capital goods industries.
3. The assumption of permanent increase in the demand for consumer goods is
unrealistic.
4. Capital – output ratio will not remain constant.
5. There is time lag before new investment is undertaken.
6. The assumption that firms are able to get sufficient funds is unrealistic.
7. The supply of resources is not elastic as assumed by J.M. Clark.
8. The industry is not in a fluid condition to increase investment.