Accelerator

The multiplier-accelerator model
Initial points
1. The model is a synthesis of the Kahn-Keynes
multiplier and the “accelerator” theory of
investment1.
2. The accelerator model is based on the truism that, if
technology (and thus the capital/output ratio) is
held constant, an increase in output can only be
achieved though an increase in the capital stock.
P. Samuelson. “Interaction Between the Multiplier Analysis and the Principle of

Acceleration,” Review of Economic Statistics (May 1939).
The accelerator
•Firms need a given quantity of capital to produce the

current level of output. If the level of output changes, they
will need more capital. How much more?
Change in capital = accelerator  change in output
(10.1)
•But firms can only increase their capital stock by
(positive) net investment. How much?
Net investment = accelerator  change in output (10.2)
•It is also true that:
Accelerator = Change in Capital/Change in Output
Capital/Out
put ratio
•If we do not allow for productivity
boosting technical change, then the
capital output ratio is held constant.
•If fact, this is what we are assuming
—no technical change.
Example of the accelerator principle
• We assume that  = 3a . That is, it takes 3 dollars

worth of capital to manufacture $1 worth of shoes.
•Hence if the demand for shoes increased by say, $10,
there would be a need for $30 in additional capital—or
equivalently, $30 in net investment.
a
Sherman & Kolk claim this is a reasonable figure since estimates show that GDP
is typically equal to 1/3 the value of the capital stock.
Time period Demand Change in Demand Shoe Change in Shoe
for Shoes for Shoes Machinery Machinery
1 $100 $300
1 to 2 $10 $30
2 $110 $330
2 to 3 $20 $60
3 $130 $390
3 to 4 $5 $15
4 $135 $405
4 to 5 $0 $0
5 $135 $405
5 to 6 -5 -$15
6 $130 $390
Formalizing the model
If the economy is in equilibrium,

Then output supplied (Y) is equal
to aggregate demand (AD).
Assuming a closed economy
without government, we have:
Yt = Ct + It (1)
Formalizing the model
•The consumption function is given by1:
Ct C  cYt  1 (2)
•We assume that investment in the current period

(It) is equal to some fraction () of change in
output in the previous period (or lagged output):
It  (Yt  1  Yt  2) (3)
1
We assume that C depends on lagged, rather than current,
income. Also note that for our simplified economy, Y = YD.
Insert (2) and (3) into (1) to obtain:
Yt C  (c  v)Yt  1  Yt  2 (4)
To get a homogenous equation, we ignore the

constant C
To get a standardized form, let A = c + .

Also, Let B = . Thus we can write:
Yt  At  1  Bt  2 0 (5)
Note for the mathematically inclined: equation (5) is

a 2nd order (homogenous) difference equation.
It can be shown
that:
1. There will be cyclical fluctuations in the time
path of national income (Yt) if A2 < 4B.
2. If B = 1 (and presuming that A2 < 4B), then
cycles are constant in amplitude.
3. If B < 1 (and presuming that A2 < 4B), then
cycles are damped—that is, amplitude is a
decreasing function of time.
4. If B > 1 (and presuming that A2 < 4B), then
cycles are explosive—that is, amplitude is a
increasing function of time.
5. There will be no cyclical fluctuations if A2 >
4B.
Example of the
Multiplier-
Period C Y Ne t I
1 $996
Accelerator
2 $1,000
3 $996 1000 $4
4 996 996 0 Assumptions: (1) Y is
5 992 988 -4
6 985 977 -8
$996 in period 1 and
7 975 965 -11 $1000 in period 2;
8 964 952 -12 (2) C = 96 + .9Yt - 1; and
9 953 940 -13
10 942 930 -12 (3)  = 1
11 933 923 -10
12 927 920 -7
13 928 925 -3
14 928 933 5
15 936 944 8
16 945 956 11
17 957 969 12
18 969 982 13
19 978 991 13
20 987 996 9
21 992 1000 8
Multiplier-Accelerator Model
Assumptions: (1) Y is $996 in period 1 and $1000 in period 2;
Data in Billions (2) C = 996 + .9Yt -- 1; and (3)  = B = 1
1020
1000
National Income (Y)
980
960
940
920
900
1 3 5 7 9 11 13 15 17 19 21
Time Period
Damped oscillations
National Income B < 1 and A2 > 4B
Time period
Explosive oscillations
National Income B > 1 and A2 > 4B
Time period
Qualifications/limitations
•This model is based on a crude theory of investment.

There is no role for “expected profits” or “animal
spirits.”
•The time lag between a change in output and a
change in (net) investment can be significant—the
investment process (planning, finance, procurement,
manufacturing, installation, training) is often lengthy.
•J. Hicks pointed out that, for the economy as a
whole, there is a limit to disinvestment (negative net
investment). At the aggregate level, the limit to
capital reduction in a given period is the wear and
tear due to depreciation.

Accelerator

Uploaded by

Copyright:

Available Formats

Accelerator

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Accelerator

Uploaded by

Copyright:

Available Formats

The multiplier-accelerator model

P. Samuelson. “Interaction Between the Multiplier Analysis and the Principle of

•Firms need a given quantity of capital to produce the

• We assume that  = 3a . That is, it takes 3 dollars

If the economy is in equilibrium,

•The consumption function is given by1:

•We assume that investment in the current period

Yt C  (c  v)Yt  1  Yt  2 (4)

To get a homogenous equation, we ignore the

To get a standardized form, let A = c + .

Note for the mathematically inclined: equation (5) is

National Income B < 1 and A2 > 4B

National Income B > 1 and A2 > 4B

•This model is based on a crude theory of investment.

You might also like