Acceleration principle

Updated: Aug 20, 2021

The hypothesis that the level of investment vanes directly with the rate of change of output. Given technological conditions and the relative prices of capital and labour, a certain size of capita! stock will be chosen to produce a particular rate of output. If this rate of output should change, then, other things being equal, the desired size of the capita! stock will also change. Since net investment is, by definition, the amount by which ca pi tal stock changes, it follows that the amount · of investment depends on the size of the change in output. At its simplest, the hypothesis asserts that investment will be proportional to the rate of change of output, at all levels of output. However, under more realistic assumptions the relationship may cease to be a simple proportional one. There may, for example, be spare capacity over some range of increasing output, s0 that the capita! stock does not have to be increased until full capacity is reached; or the capita! intensity of production may yary as the level of output varies. In addition, the relation will be influenced by expectations, time lags, etc. As well as being very important in explaining the determination of investment expenditure in the economy, the acceleration principle also plays an. important part in theories of the trade cycle, e.g. the accelerator­multiplier model, and the theory of economic growth, e.g. in the Harrod-Domar model.

Reference: The Penguin Business Dictionary, 3rd edt.

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James Knight
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James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.