Thursday, August 27, 2009

Concepts of Accelerator, its Utility and Limitations

The accelerator is the numerical value of the relation between an increase in income and the resulting increase in investment. In other words, the acceleration principle simply tells us that if owing to increase in people’s incomes, the demand for consumption goods increases, the derived demand for the factors of production, producer’s goods in particular, say machines to make the consumption goods will increase. But the point to be noted is that investment in the making of machines will even increase faster than the demand for the product.

Let us be clear about the concept of the Accelerator. When income increases people’s spending power increases; their consumption increases and consequently demand for consumer goods increase. In order to meet this enhanced demand, investment must increase to raise the productive capacity of the community. Initially, however, the increased demand will be met by over working the existing plants and machinery. All this leads to increase in profits which will induce entrepreneurs to expand their plants by increasing their investments. Thus a rise in income leads to a further induced investment thus acceleration in economy take place.

LIMITATIONS OF THE ACCELERATOR:

The following assumptions of the principle of accelerator which make it unrealistic

(i) We have assumed that there is no excess capacity existing in consumer goods industries. In other words we have assumed that no machine is lying idle and shift working is not possible. If there had been excess capacity and shift working was possible the supply of goods could be increased with the existing equipment and accelerator would not come into play.

In the capital goods industries, we have assumed the existence of surplus capacity. If there was no excess capacity in the machine making industry, increased demand for machines could not lead to increase in the supply of machines. Actually the things are not rigid as supposed.

(ii) The second assumption is the flexibility of output. It is assumed that machine making industry is capable of increasing its output for the time being at least. The supply can be increased by reducing stocks of the finished machines, by working extra shifts, and so on. But stocks can be reduced below zero and working double shifts or adoption of other experiments is found to be expensive. Only when the demand has increased permanently, will the entrepreneur find it worth while to increase investment for installing additional machines.

(iii) The size of the accelerator does not remain constant over time. Its value will be affected by the business man’s calculations regarding the profitability of installing new plants to make more machines on the basis of their probable working life. It also assumes that the demand for machines will remain stable in future, although the increase in demand has suddenly cropped up. The entrepreneur will have to make so may complicated calculations like the future demand for final product made by machines, about the future demand for machines themselves, about the cost and availability of machines, about the interest rates and so on. This indeed is too much for an average entrepreneur.

UTILITY OF THE ACCELERATOR:

In spite of these limitations and difficulties, the concept of the accelerator has proved a very useful tool of economic analysis. There is no doubt that it has restricted application but it does not mean that it has no place in any realistic discussion of the factors affecting income and employment, some economists have made use of the acceleration principle in formal mathematical models to bring out how an economy would react if there was sudden increase in demand for goods.

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