Tutors on net
Tutors on NetTutors on Net

Principle Of Acceleration Part - II

 Principle of Acceleration and the Super Multiplier - Part I

Does not explain Timing of Investment

The assumption of the existence of full capacity implies that increased demand for output immediately leads to induced investment. the acceleration principle, therefore fails to explain the timing of investment. at best it explains the volume of investment.

As a matter of fact, there may be a time lag before new investment can be generated. For instance if the time lag is four years, the effect of new investment will not be felt in one year, but in four years.

  1. Does not consider Availability and Cost of Capital Goods

    The timing of the acquisition of capital goods depends on their availability and cost and the availability and cost of financing them. The theory does not consider these factors.

  1. Acceleration Effect Zero for Installed Equipment

    It is assumed that no increase in demand for consumer goods has been foreseen and provided for in previous capital investment. if by anticipating future demand, capital equipment has already been installed, it would not lead to induced investment and the acceleration effect will be zero.

  1. Does not Work for Temporary Demand

    This theory further assumes that the increased demand is permanent. In case the demand for consumer goods is expected to be temporary the producers will refrain from investing in new capital goods. Instead they meet the increased demand by working the existing capital equipment more intensely. So the acceleration will not materialise.

  1. Supply of Credit not Elastic

    The acceleration principle assumes an elastic supply of credit so that when there is induced investment as a result of induced consumption, cheap credit is easily available for investment in capital goods will be very low. Thus the acceleration will not work fully.

  1. Neglects the role of Expectations

    The acceleration principle neglects the role of expectations in decision making on the part of entrepreneurs. The investment decisions are not influenced by demand alone. They are also affected by future anticipations like stock market changes, political developments, international events, economic climate etc.

  1. Neglects Profits as a Source of Internal Funds

    This assumption further implies that firms resort to external sources of finance for investment purposes. But empirical evidence has shown that firms prefer internal sources of finance to external sources. The acceleration principle is weak in that it neglects profits as a source of internal sources of finance to external sources. The acceleration principle is weak in that it neglects profits as a source of internal finance. As a matter of fact, the level of profits is a major determinant of investment.

  1. Neglects the Role of Technological Factors

    The acceleration principle is weak in that it neglects the role of technological factors in investment. Technological changes may be either capital saving. They may therefore, reduce or increase the volume of investment.

    Further as pointed out by Prof. Knox, “Capital equipment may be bulky and the employment of additional plant is justified only when output has risen considerably. This factor is all the more important for the reason that usually what is added is a complex of machines and not a machine.

  1. Fails to Explain Lower Turning Point

    According to Knox, the acceleration principle is not of much use for explaining lower turning point.

  1.  Not Precise and Satisfactory

    Again, Knox points out that the acceleration, principle is not precise and is unsatisfactory. It is therefore, inadequate as theory of investment.

            Conclusion

      Despite these limitations, the principle of acceleration makes the process of income propagation clearer and more realistic than the multiplier theory. The multiplier shows the effect of a change in investment on income via consumption while the acceleration shows the effect of consumption or output on investment and income.

      Thus the acceleration explains volatile fluctuations in income and employment as a result of fluctuations in capital goods industries. But it can explain upper turning points better than lower turning points.

Super Multiplier or the Multiplier Accelerator Interaction

      In order to measure the total effect of initial investment on income, Hicks has combined the multiplier and the accelerator mathematically and given it the name of the super multiplier. The combined effect of the multiplier and the accelerator is also called the leverage effect which may lead the economy to very high or low level of income propagation. The super multiplier is worked out by combining both induced consumption cY or ΔC / ΔY or MPC and induced investment vY or Δ I / ΔY or MPI. Hicks divides the investment component into autonomous investment and induced investment so that investment I = Ia + vY, where Ia is autonomous investment and vY is induced investment.

Online Live Tutor Acceleration Effect Zero for Installed Equipment:

    We have the best tutors in Economics in the industry. Our tutors can break down a complex Acceleration Effect Zero for Installed Equipment problem into its sub parts and explain to you in detail how each step is performed. This approach of breaking down a problem has been appreciated by majority of our students for learning Acceleration Effect Zero for Installed Equipment concepts. You will get one-to-one personalized attention through our online tutoring which will make learning fun and easy. Our tutors are highly qualified and hold advanced degrees. Please do send us a request for Acceleration Effect Zero for Installed Equipment tutoring and experience the quality yourself.

Online Principle of Acceleration and the Super Multiplier- Part I Help:

    If you are stuck with an Principle of Acceleration and the Super Multiplier- Part I Homework problem and need help, we have excellent tutors who can provide you with Homework Help. Our tutors who provide Principle of Acceleration and the Super Multiplier- Part I help are highly qualified. Our tutors have many years of industry experience and have had years of experience providing Principle of Acceleration and the Super Multiplier- Part I Homework Help. Please do send us the Principle of Acceleration and the Super Multiplier- Part I problems on which you need help and we will forward then to our tutors for review.

Other topics under Consumption, Investment and Saving functions: