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Importance of the accelerator
The accelerator principle indicates how changes in the level of current income will have an accelerated impact on the level of investment and is, therefore, one explanation of economic instability and the upward and downward swings of the trade cycle.
Accelerator principle - some qualifications
- The upward leverage effect of the accelerator only takes effect if industry is operating at or near full employment. If industry has excess capacity it can meet any increase in demand by increasing output of underutilised equipment.
- Additional machines will only be ordered when the increased demand is believed to be permanent. Otherwise, firms will deal with additional orders by running down stocks or operating waiting lists.
- There may be an increase in demand for investment goods, but if the capital goods industries are fully employed, there may be an increase in the prices of capital goods and there could actually be a fall in demand for capital with more capital saving techniques being adopted. Here the accelerator will be reduced.
Weaknesses of accelerator theory
The accelerator assumes a fixed relationship between a change in consumption and a change in investment - the bullet points above show that this is not necessarily the case. The accelerator principle also ignores the time lags, which would probably occur in reality, between a change in consumption and the implementation of any investment decisions.