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Principle Of Acceleration Part - I

 Principle of Acceleration and the Super Multiplier

            The principle of acceleration is based on the fact that the demand for capital goods is derived from the demand for consumer goods which the former help to produce. The acceleration principle explains the process by which an increase in the demand for consumption goods leads to an increase in investment on capital goods. According to Kuriala, “The accelerator co-efficient is the ratio between induced investment and an initial change in consumption expenditure.”

            Metaphorically, v = Δ I / Δ C or Δ I = v Δ C where v is the accelerator co-efficient, Δ I is net change in investment and Δ C is the net change in consumption expenditure. If the increase in consumption expenditure is $10 millions and leads to an increase of investment of $ 30 millions, the accelerator co-efficient would be 3.

The 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. Thus the accelerator v is equal to Δ I / Δ Y or the capital output ratio. It depends on the relevant change in output Δ Y and the change in the investment Δ I. it shows that the demand for capital goods is not derived from consumer goods alone but from any direct demand 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 the change in output. Thus Δ I = v Δ Y, where v is the accelerator. If a machine has a value of $ 4millions and produces output worth $ 1 million every year must invest $ 4 millions on this 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 is constant, gross investment will vary with the level of investment corresponding to each level of output.

The acceleration principle can be expressed in the form of the following equation:

                                    Igt       =          v (Yt – Yt-1) + R

                                                =          v Δ Yt + R

Where Igt, is gross investment in period  t, v is the accelerator, Yt is the national output in period t. Yt-1 is the national output in the previous period (t-1) and R is the replacement investment. The equation tells that gross investment during the period t depends on the change in the output (Y) from period t-1 to period t multiplied by the accelerator v plus replacement investment R. In order to arrive at net investment (In), R must be deducted from both sides of the equation so that net investment in period t is

                                    Int        =          v (Yt – Yt-1)

                                                =          v Δ Yt

If Yt > Yt-1, net investment is positive during period t. on the other hand, if Yt < Yt-1, net investment is negative or there is disinvestment in period t.

Criticisms

The acceleration principle has been criticised by economists for its rigid assumptions which tend to limit its smooth working. The following are its limitations.

  1. Capital Output Ratio not Constant

    The acceleration principle is based on a constant capital output ratio. But his ratio does not remain constant in the modern dynamic world. Inventions and improvements in techniques of production are constantly taking place which lead to increase in output per unit capital. Or existing capital equipment may be worked more intensively.

    Moreover change in the expectations of business men with regard to prices, wages, interest may affect future demand and vary the capital-output ratio. Thus the capital output ratio does not remain constant but changes in the different phases of the trade cycle.

  1. Resources not Elastic

    The acceleration principle assumes that the resources should be elastic so that they are unemployed in the capital goods industries to enable them to expand. This is feasible when there is unemployment in the economy. But once the economy reaches the full employment level, the capital goods industries fail to expand due to the non-availability of sufficient resources. This limits the working of the acceleration principle. So this principle will not apply in a recession where excess capacity is found.

  1. Idle Capacity in Plants

    The acceleration theory assumes that there is no unused capacity in plants. But if some machines are not working to their full capacity and are lying idle, then an increase in the demand for consumer goods will not lead to the increased demand for new capital goods. In such a situation the acceleration principle will not work.

  1. Difference Between Required and Real Capital Stock

    It assumes no difference between required and real capital stock. Even if it exists it ends in one period. But if industries are already producing capital goods at full capacity, it is not possible to end the difference in one period.

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Other topics under Consumption, Investment and Saving functions: