ACCELERATOR

The accelerator takes into account the effect of income on investment. The term ‘accelerator’ is associated with the name of J.M. Clark (1914).  The concept of accelerator articulates, when income or consumption increases, investment also increases by a multiple amount. 

1. While the multiplier considers the effect of investment on income, the accelerator examines the effect of income on investment.
2. The original investment acts as a stimulus to consumption and thereby to income and employment.  The multiplier does not take into consideration the effect of income on investment. 
3. The accelerator has become a powerful tool of economic analysis.   
4. When income increases, peoples’ spending power increases; their consumption increases and consequently the demand for consumer goods also increases.  In order to meet this enhanced demand, investment must also rise to increase the productive capacity of the society.  
5. In the beginning, however, the increased demand will be met by over-working the existing plants and machinery.  All this leads to increase in profits that will induce entrepreneurs increasing investments.  Thus an increase in income leads to a further induced investment.   
6. The accelerator is the numerical value of the relation between an increase in income and the resulting increase in investment.

The following example demonstrates the working of the instrument of accelerator.

The table shows that during period t-1 and periods before it, output is $500. Given that the capital-output ratio is equal to 3, then to produce $500 worth of output, $1500 worth of capital will be require. Since depreciation of capital occurred in period t-1, existing capital will be one-fifth of the stock in the previous period. Therefore, replacement investment in period t-1 will be $300. Since, as compared to the previous period, there is no alter in output in period t-1, the net investment in period t-1 will be equal to zero. As a result, the gross investment in period t-1 will be $300. From changes in output in different periods we can find out net investment that will take place in any period and with the capital replacement we can obtain the gross investment that will occur in any period. 
Assumptions of the Accelerator: 
1.The concept of accelerator assumes that there is no excess capacity existing in the consumer goods industries.  There is no idle capacity and shift working is not possible. 
 2. It is assumed that in capital goods industries, there exists surplus capacity. In the absence of excess capacity in capital goods industries, increased demand for machines could not cause an increase in the supply of machines. 
3. The machine-making industry or capital goods industry can increase its output whenever needed

Criticism of the Concept: 
 The concept of accelerator has been criticized on the following grounds. 1. Kaldor pointed out that we could not assume a constant value of the accelerator throughout the trade cycle. It is not true that an increase in output or income by an amount must always give rise to a multiple increase in investment. This is because some capacity is already lying idle. We can try to use them before rushing for new equipment. 
2. If the entrepreneurs expect a rise in demand brought about by increase in income or output is only a temporary rise, they will try to meet it by overworking the existing machinery rather than installing a new plant. While the concept of accelerator assumed that there is no excess capacity existing in consumer goods industries.