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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 ?
CLINICAL AND COMPACT: The EMMA particle accelerator in Cheshire, used by Prof Roger Barlow, right, of the University of Huddersfield
HQ02a, along with other scheduled upgrades to the LHC, could eventually allow the particle accelerator to produce 10 times more particle collisions than the original design.
Professor Roger Barlow will be leading the particle accelerator research at the university.
This year Particle Accelerator has joined forces with Putnam P.
The Tevatron particle accelerator at the Fermi National Accelerator Laboratory (Fermilab) in Illinois, US, is the LHC's rival.
The project will be reported in detail at the Particle Accelerator Conference, March 29-April 2, in New York City (e-mail weng@bnl.
The ball pinged and ponged around Thousand Oaks High goalkeeper Dan Grimm on Wednesday like an electron in a particle accelerator.
Since the first particle accelerator was built by Cockcroft and Walton (see 1929), the energy produced by particle accelerators had increased enormously.
But now University of Texas at Austin physicists have created a particle accelerator that can fit on a tabletop.
It is a particle accelerator used by physicists to study the smallest known particles - the fundamental building blocks of all things.
Europe's Large Hadron Collider set a new record to become the world's the highest-energy particle accelerator on November 30.