Accelerator Theory

What is Accelerator Theory?

The accelerator theory, a Keynesian concept, specifies that capital investment outlay is a function of output. For instance, an increase in national income, as estimated by the gross domestic product (GDP), would see a proportional increase in capital investment spending.

Figuring out Accelerator Theory

The accelerator theory is an economic hypothesis by which investment expenditure increases when either demand or income increases. The theory likewise recommends that when there is excess demand, companies can either diminish demand by raising prices or increase investment to satisfy the level of need. The accelerator theory posits that companies ordinarily decide to increase production, subsequently expanding profits, to meet their fixed capital to output ratio.

Fixed capital to output ratio states that if one (1) machine was expected to create a hundred (100) units and demand rose to 200 (200) units, then investment in one more machine would be expected to satisfy this increase in need. According to a large scale policy point of view, the accelerator effect could act as a catalyst for the multiplier effect, however there is no direct correlation between these two.

The accelerator theory was brought about by Thomas Nixon Carver and Albert Aftalion, among others, before Keynesian economics, however it came into public information as the Keynesian theory overwhelmed the field of economics in the twentieth century. A few pundits contend against the accelerator theory since it eliminates all possibility of demand control through price controls. Empirical research, be that as it may, upholds the theory.

This theory is normally deciphered to lay out new economic policy. For instance, the accelerator theory may be utilized to decide whether acquainting tax cuts with create more disposable income for consumers — consumers who might then demand more products — would be desirable over tax cuts for organizations, which could involve the extra capital for expansion and growth. Every government and its financial experts plan an interpretation of the theory, as well as questions that the theory can help reply.

Accelerator Theory Example

Consider an industry where demand is continuing to rise at a strong and fast pace. Firms that are operating in this industry answer this growth in demand by extending production and furthermore by completely using their existing capacity to create. A few companies likewise satisfy an increase in need by selling down their existing inventory.

Assuming there is an obvious sign that this higher level of demand will be supported for a long period, a company in an industry will probably opt to help expenditures on capital goods — like equipment, technology, or potentially factories — to additional increase its production capacity. Subsequently, demand for capital goods is driven by elevated demand for products being supplied by the company. This triggers the accelerator effect, which states that when there is a change in demand for consumer goods (an increase, in this case), there will be a higher percentage change in demand for capital goods.

An illustration of a positive accelerator effect is investment in wind turbines. Unpredictable oil and gas prices increase the demand for renewable energy. To satisfy this need, investment in renewable energy sources and wind turbines increases. Notwithstanding, the dynamic can happen in reverse. In the event that oil prices collapse, wind farm ventures might be delayed, as renewable energy is economically less reasonable.

Features

• When confronted with excess demand, the accelerator theory posits that companies normally decide to increase investment to meet their capital to output ratio, in this way expanding profits.
• The accelerator theory specifies that capital investment outlay is a function of output.
• The accelerator theory was brought about by Thomas Nixon Carver and Albert Aftalion, among others, before Keynesian economics, yet it came into public information as the Keynesian theory overwhelmed the field of economics in the twentieth century.