What Is the Acceleration Principle?
The acceleration principle is an economic concept that draws a connection between fluctuations in consumption and capital investment. It states that when demand for consumer goods increases, demand for equipment and other investments necessary to make these goods will grow even more. In other words, if a population’s income increases and it, as a result, begins to consume more, there will be a corresponding but magnified change in investment.
Under the acceleration principle, the reverse is also true, meaning a decrease in consumption spending will tend to be matched by a larger relative decrease in investment spending as businesses freeze investment in the face of falling demand. The acceleration principle, also referred to as the accelerator principle or the accelerator effect, thus helps to explain how business cycles can propagate from the consumer sector into the business sector.
How does the Acceleration Principle Work?
The acceleration preceded the Keynesian economics, it was developed by Thomas Nixon Carver and Albert Aftalion, and some other economists. In economics, acceleration principle is based on an assumption that increase in production rates, consumption and incomes translates to an increase in the investments made by companies. Hence, increase or decrease in production and income rates affect investment deals. When rates of production and profits rise, investors are encouraged to make investments in order to realize profits as well. One of the criticisms against the acceleration principle is its failure to capture the possibility of controlling demand through price controls.
An Example of The Acceleration Principle
Acceleration principle can be well understood by examining an industry that experiences a significant growth in production, demand and income. This growth will automatically be extended to companies in this industry, they increase in production rates and have quick turnover of inventories. This industry will witness an influx of investments, especially, if the rapid and significant increase will continue for a continuous period of time. Also, if there is an indication of continuous period of increase and growth, the industry will likely increase capital expenditures in order to expand its production capacity. More capital goods will be purchased and this is influenced by an increase in demand for products in the industry.
The acceleration principle has the effect of propagating booms and recessions in the economy and is a core aspect of the Keynesian macroeconomic theory of recessions.
A sustained acceleration of demand can ultimately induce a large increase in investment spending, triggering a period of rapid economic expansion. Likewise, less demand can result in a sharp cutback in investment and a decline in general business activity. Business expectations about the future path of consumer demand play a large role on both sides.
These observations form part of the foundation of Keynes’s theory of how an economy can experience a sustained downturn. The acceleration effect can also interact with the investment multiplier effect to magnify both economic booms and recessions in this theory.
The Effects of The Acceleration Principle on The Economy
One of the effects of the acceleration principle on the economy of a nation is that it magnifies economic growth/booms as well as recessions in the economy. This means that both the growth and depression that an economy experiences are overstressed by the acceleration principle. During periods of depression (recessions) companies reduce their investments and during economy booms, there is a spike in investment rate. However, reduction of investment during recessions can elongate the period of economic depression because fewer jobs will be created.
Multiplier and Accelerator
Oftentimes, people confuse multiplier with accelerator, both economic concepts differ. Multiplier reflects how a change in investment affect income and employment while accelerator reflects how a change in production and consumption affect investment. Both economic concepts seek to show the connection or interaction between investments and production/consumption. For multiplier, consumption is dependent upon investment, while accelerator maintains that investment is dependent upon consumption.