Acceleration Principle (Economics) - Explained
What is the Acceleration Principle?
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What is the Acceleration Principle?
An acceleration principle is an economic theory that explains the connection between a change in production rate and a change in capital investment. This economic concept explains investment behavior, how a change in investment demand is influenced by changes in the rate of production. Explicitly, the rate of production is the influencer of investment demand, therefore, a change in the rate of production automatically translates into a change in investment demand and direction. An increase in production and consumption results in high investments while a decline in production and consumption rate negatively impacts investment demand. Acceleration Principle explains the link between these two concepts.
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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 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.
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