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Accelerator Principle

The idea that a small change in consumer behavior can have a large effect on a company's investment. For example, suppose $100 of investment in a bakery produces $100 worth of baked goods. If consumers usually buy $100 of baked goods each year but this increases to $110, the bakery must buy 10% more equipment, baking materials, and so forth, which can increase the amount it invests in its suppliers by more than 10%. The accelerator principle exacerbates advances and declines; it is used in various models of the business cycle. See also: Multiplier.
Acceleratorclick for a larger image
Fig. 2 Accelerator. The graph shows how gross national product and the level of investment vary over time.


the relationship between the amount of net or INDUCED INVESTMENT (gross investment less REPLACEMENT INVESTMENT) and the rate of change of NATIONAL INCOME. A rapid rise in income and consumption spending will put pressure on existing capacity and encourage businesses to invest, not only to replace existing capital as it wears out but also to invest in new plant and equipment to meet the increase in demand. By way of simple illustration, let us suppose a business meets the existing demand for its product, utilizing 10 machines, one of which is replaced each year. If demand increases by 20%, it must invest in two new machines to accommodate that demand in addition to the one replacement machine.

Investment is thus, in part, a function of changes in the level of income: I = f(AY). A rise in induced investment, in turn, serves to reinforce the MULTIPLIER effect in increasing national income.

The combined effect of accelerator and multiplier forces working through an investment cycle has been offered as an explanation for changes in the level of economic activity associated with the BUSINESS CYCLE. Because the level of investment depends upon the rate of change of GNP, when GNP is rising rapidly then investment will be at a high level, as producers seek to add to their capacity (time t in Fig. 2). This high level of investment will add to AGGREGATE DEMAND and help to maintain a high level of GNP. However, as the rate of growth of GNP slows down from time t onward, businesses will no longer need to add as rapidly to capacity, and investment will decline towards replacement investment levels. This lower level of investment will reduce aggregate demand and contribute towards the eventual fall in GNP. Once GNP has persisted at a low level for some time, then machines will gradually wear out and businesses will need to replace some of these machines if they are to maintain sufficient production capacity to meet even the lower level of aggregate demand experienced. This increase in the level of investment at time t1 will increase aggregate demand and stimulate the growth of GNP Like FIXED INVESTMENT, investment in stock is also to some extent a function of the rate of change of income so that INVENTORY INVESTMENT is subject to similar accelerator effects.

References in periodicals archive ?
Accelerant operated a USD 25m early-stage fund that will now move under BIP Capital's helm.
After State Farm assured the police that they would have control of the program and get to create a standard and certification for accelerant detection canines, the first training class took place in 1993 under the guidance of the Maine State Criminal Justice Academy.
There's no real evidence of a third party and with regards to the vessel containing the accelerant, it remains unknown.
He is ''imprinted'' on 17 of the most common accelerants used in arsons -- among them gas, diesel, kerosene, lighter fluid, Coleman fuel, mineral spirits, acetone, and lacquer thinner.
785 liters of gasoline accelerant by car center, windows open, platform side doors open.
When a dog sits and indicates an accelerant has been detected, the dog is fed by hand as a reward.
It needs to accelerate the speed of performance on an ongoing basis, much like the many accelerants used in various chemical processes.
We urge people to be aware of the dangers of using accelerants such as petrol.
It appears an accelerant was used due to the extent and speed of the fire, they poured something in there.
Police say an accelerant was used to set fire to the front of the house in Smallbridge, near Rochdale in Greater Manchester.
A strong smell of accelerant remained at the property hours after the fire had been put out by fire crews.