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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 ?
The projects are aimed at making discoveries about the makeup of matter when the Large Hadron Collider - the world largest atom smasher - starts collecting data later this year.
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Zarkoff to ask his mother's permission to build an atom smasher in his garage ("Sure!" he remembers her saying).
To which variety of interest does the government respond when it appropriates disaster relief to washed-out Iowans, makes the most-favored-nation status of a country dependent on its human-rights record, builds a multi-billion-dollar atom smasher in Texas and a Holocaust memorial museum in Washington, permits homosexuals to serve in the military, won't allow 18-year-olds to buy beer, awards grants to performance artists, grades meat?
LEON LEDERMAN, the Nobel physicist and former director of Fermi National Accelerator Lab, recalls that in 1967, when he was still a professor at a famous university in New York, the site for a 200-GeV atom smasher was publicly announced as "Batavia, Illinois." "At Columbia Univ.," Lederman notes, "we studied the headline and someone exclaimed, Does anyone know where "Illinois" is?' "
DOE ROLLS OUT MAGNETIC CARPET...The DOE was seen courting about 100 high-tech industry reps last month, acquainting them with its $4.4 billion proposal to build an atom smasher. The bidding has begun n phase one of Superconducting Super Collider (SSC).
Washington, Jan 7 ( ANI ): Engineers are carrying out a revamp to help the world's largest and most powerful atom smasher reach maximum energy levels with a 2-year hibernation period starting March, so that it could help in more stunning discoveries following the detection of the so-called "God particle."
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