The accelerator theory states that an increase in demand for consumer goods will lead to an increase in demand for capital goods used to produce those consumer goods. It explains the relationship between consumer goods industries and capital goods industries. The accelerator coefficient is the ratio of change in investment to change in consumption or output. The accelerator theory was introduced by T.N. Carver in 1903 and further developed by economists like Harrod, Solow, Samuelson and Hicks to explain business cycles. It assumes a constant capital-output ratio and elastic supply of credit and resources so investment can adjust to changes in demand.

1. Accelerator TheoryAccelerator Theory
By:
Khemraj Subedij
Lecturer
Tikapur Multiple Campus
M.Phill (Economics)
M.A. (Economics)
M.Ed. (Economic)

2. Acceleration Theoryy
The principle of acceleration states that if demand for consumption
d h ll b h d d f f fgoods rises, there will be an increase in the demand for factor of
production, say machine, which is used to produce the goods. In
other words, the accelerator measures the changes in investment
goods industries as a result of changes in consumption goodsgoods industries as a result of changes in consumption goods
industries.
K K Kurihara, " The acceleration coefficient is the ratio between
induced investment and an initial change in consumption."g

3. The accelerator theory was introduced byT.N. Carver in
1903 d J M Cl k i 19171903 and J.M. Clark in 1917.
Later on , it was rigorously developed by economists like
Harrod, Solow, Samuelson, Hicks, etc. in trade cycle
theory.
The accelerator theory explains the interrelationship
between customer goods industries and capital goods
industries in an economy.
It states that when the demand for consumer goodsg
increases, the demand for capital goods also increase, i.e.,
there is positive association between capital goods andp p g
consumer goods industries.

4. According to Samuelson, accelerator (v) is as defined
the ratio of change in investment to the change in
consumption demand, i.e.
V = ∆I/∆C
Where,,
∆I = Change in investment outlays
∆C = Change in Consumption demand

5. According to Hicks, accelerator (V) is the ratio of
change in investment to the change in the level of
output. i.e.,
V = ∆I/∆YV ∆I/∆Y
Where,
∆I = Ch i i t t tl∆I = Change in investment outlays
∆Y = Change in the level of output.

6. iAssumptions
Capital output ratio remains constant.
Th h ld b i i h i l d i d iThere should be excess capacity in the capital goods industries.
There is permanent change in consumption demand.
Th l f h ld b l ti th t th i t t iThe supply of resources should be elastic so that the investment in
capital goods industries can be increased easily.
There should be elastic supply of cheap creditThere should be elastic supply of cheap credit.
Technology remains constant.
There is absence of time lag.g

7. Model of Accelerator
a I =V (Y Y )a. Int =V (Yt -Yt-1 )
Where
In = Net investment at time period tInt = Net investment at time period t .
V = Accelerator.
Y = Output at time period tYt Output at time period t.
Yt-1 = Output at preceding time period.
b. Ig t = Int + R
Where, Ig t = Gross investment at time period t., g t p
R = Depreciation investment (depreciation) which is assumed to be
constant.

8. c. In static concept,
V = Kt/Yt = (COR)
or, Kt =V.Yt
Where, Kt= Capital stock at time period t.
Yt = Output at time period.

9. Working of Accelerator (Let V = 2)
t Y K ( =VY ) I =V (Y Y ) R= 10% f I = I + Rt Yt Kt ( =V.Yt) Int =V (Yt -Yt-1 ) R= 10% of
initial Kt
Ig t = Int + R
1 100 200 - 20 -
2 100 200 0 20 20
3 105 210 10 20 30
4 115 230 20 20 40
5 130 260 30 20 50
6 140 280 20 20 40
7 145 290 10 20 307 145 290 10 20 30
8 140 280 -10 20 10
9 130 260 20 20 09 130 260 -20 20 0
10 125 250 -10 20 10

10. Hence the acceleration coefficient is the ratio between theHence, the acceleration coefficient is the ratio between the
induced investment to a net change in consumption
expenditures.
Symbolically,
β= ∆I/∆C
Where, β= Acceleration coefficientW e e, β cce e at o coe c e t
∆I = Net change in investment outlays
∆C = Net change in consumption outlays

11. SupposeSuppose ,
Change in expenditure on Consumption(∆C )= Rs. 10
CroresCrores
Change in investment outlays (∆I ) =Rs. 20Change in investment outlays (∆I ) Rs. 20
Crores.
We have, β= ∆I/∆C
= 20/10 = 2
It implies, that Re 1 increase in demand for consumption
goods leads to Rs. 2 increase in demand for investment
outlays.

12. Thus the principle of acceleration is based on the fact that theThus, the principle of acceleration is based on the fact that the
demand for capital goods is derived from the demand for
consumer goods. The acceleration principle explains the process
by which a change in demand for consumption goods leads to ay g p g
change in investment on capital goods.