The Acceleration Principle

Introduction:
T.N. Carver was the earliest economist who recognized the relationship between changes in consumption and
net investment in 1903. But it was Aftalion who analyzed this principle in detail in 1909. The term acceleration
principle itself was first introduced into economics by J. M. Clark in 1917. It was further developed by Hicks,
Samuelson, and Harrod in relation to the business cycles.
The Principle of Acceleration:
The acceleration principle explains the process by which an increase (or decrease) in the demand for
consumption goods leads to an increase (or decrease) in investment on capital goods. According to Kurilara,
The accelerator coefficient is the ratio between induced investment and an initial change in consumption
expenditure.
Symbolically,

v = I/C

or

I = vC

Where v is the accelerator coefficient, I is net change in investment and C is the net change in
consumption expenditure.
Operation of the Acceleration Principle:
The working of the acceleration principle is explained in Table I.

The table traces changes in total output, capital stock, net investment and gross investment over ten time
periods. Assuming the value of the acceleration v=4, the required capital stock in each period is 4 times the
corresponding output of that period, as shown in column (3).

The replacement investment is assumed to be equal to 10 percent of the capital stock in period t, shown as
40 in each time period. Net investment in column (5) equals v times the change in output between one
period and the preceding period.
Thus the table reveals that net investment depends on the change in total output, given the value of the
accelerator. So long as the demand for final goods (output) rises net investment is positive.
But when it falls net investment is negative. In the table, total output (column 2) increases at an increasing rate
from period to t+4 and so does net investment (column 5). Then it increases at a diminishing rate from
period t+5 to t+6 and net investment declines from period t+7 to t+9, total output falls, and net investment
becomes negative.
The acceleration principle is illustrated diagrammatically in Figure 1 where in the upper portion, total output
curve Y increases at an increasing rate up to t+4 period, then at a decreasing rate up to period t+6". After
this it starts diminishing.
The curve In in the lower part of the figure
shows that the rising output leads to
increased net investment upto t+4 period
because output is increasing at an increasing
rate. But when output increases at decreasing
rate between t+4 and t+6 periods, net
investment declines.
When output starts declining in period t+7,
net investment becomes negative. The gross
investment curve behaves similarly to the net
investment curve. But there is one difference
that gross investment is not negative and once
it becomes zero in period t+8, the curve
Ig again starts rising. This is because despite
net investment being negative, the
replacement investment is taking place at a
uniform rate.

Assumptions:
1. The acceleration principle assumes a constant capital-output ratio.
2. It assumes that resources are easily available.
3. It assumes that there is no excess or idle capacity in plants.
4. It is assumed that the increased demand is permanent.
5. It also assumes that there is elastic supply of credit and capital.
6. It further assumes that an increase in output immediately leads to a rise in net investment.