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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.
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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.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
References in periodicals archive ?
In addition to Accelerant's program of rural hubs, there are initiatives from both the public and private sectors to get cutting-edge job training into rural communities.
Paul Iaffaldano, founder and managing partner of Accelerant, will join BIP Capital as managing director and will help lead the growth of the firm's venture technology companies.
Other cities in Pennsylvania have taken notice and four more communities now have accelerant detection dogs of their own.
He can detect as little as two microliters of accelerant -- that is, two one-millionths of a liter -- and he can do it in smoky darkness, while the embers of a fire still burn around him and smoke detectors and sirens wail.
De plus, de remarquer cet autre danger qui est de traverser les rues principales de la premiere ville du pays, tant la rarete des passages proteges et la quasi invisibilite des lignes blanches de ces memes passages; outre les automobilistes accelerant a la vue d'un pieton traversant...
Although it is likely that the average heat release rate of 2.5MW will not be exceeded for an interior fire, a 5MW FHRR is being recommended as a reasonable safety factor to account for: spill over of a fire to the trackway, combustibles brought into the train by passengers, and the use of a more potent accelerant
Clerk of the course Emma Marley said yesterday: "Last month it was burnt and the accelerant got into the turf and soil and so we had to dig out the static fence as well as the turf and soil.
The program trains the four-legged friends to help investigators pinpoint the location of accelerant residue, such as gasoline, kerosene and lighter fluid.
Although it was not immediately clear whether gas or another type of accelerant was used to ignite the fire, the FDNY spokesperson said that "it was a fast-moving fire" and city officials said that it initially appears to be criminally motivated.
The decor particle comprises a second additive, the colorant, and at least one of: an epoxy resin and a curative; an epoxy resin, an acid-terminated polyester resin and an accelerant; or an acid-terminated polyester resin and a curative.
Never a constituency to miss a perceived threat (all the better to justify giant arms expenditures), the Pentagon is now warning that climate change is an "instability accelerant" that could put US troops in danger.