Question

3. From the service economy came the idea of a weaker accelerator referencing the “Acceleration Theory”. Who described this theory? Briefly describe the theory.

Answer 1

The accelerator theory was postulated by Thomas Nixon Carver and Albert Aftalion before Keynesian economics, but it came into public knowledge as the Keynesian theory began to dominate the field of economics in the 20th century.

The accelerator theory stipulates that capital investment outlay is a function of output.The accelerator theory is an economic postulation whereby investment expenditure increases when either demand or income increases. The theory also suggests that when there is excess demand, companies can either decrease demand by raising prices or increase investment to meet the level of demand. The accelerator theory posits that companies typically choose to increase production, thereby increasing profits, to meet their fixed capital to output ratio.The acceleration principle explains the process by which an increase (or decrease) in the demand for consumption goods leads to an increase (or decrease) in investment on capital goods. According to Kurchara, “The accelerator coefficient is the rate between induced investment and an initial change in consumption expenditure”.

Symbolically, B = I/C or I = B​​​​​​​C where B is the accelerator coefficient. I is net change in investment and ​​​​​​​C is the net change in consumption expenditure. If the increase in consumption expenditure of Rs. 10 crores leads to an increase in investment of 30 crores, the accelerator coefficient is 3.This version of the acceleration principle has been more broadly interpreted by Hicks as the ratio of induced investment to changes in output it calls forth. This the accelerator v is equal to I/Y or the capital –output ratio. It depends on the relevant change in output (Y) and the change in investment (I). It shows that the demand for capital goods is not derived from consumer goods alone but from any direct of national output. In an economy, the required stock of capital depends on the change in the demand for output. Any change in output will lead to a change in the capital stock. This change equals v times to changes in output. Thus I = v Y where v is the accelerator. If a machine has a value of Rs. 4 lahks and produces output worth Rs. 1 lakh, then the value of V is. An entrepreneur who wishes to increase his output by Rs. 1 lakh every year must invest Rs.4 lakh on the machine. This equally applies to an economy where if the value of the accelerator is greater than one, more capital is required per unit of output so that the increase in net investment is greater than the increase in output that causes it. Gross investment in the economy will equal replacement investment plus net investment. Assuming replacement investment (i.e. replacement demand for machines due to obsolescence and depreciation) to be constant, gross investment will vary with the levels of investment corresponding to each level of output