The accelerator effect in economics refers to a positive effect on private fixed investment of the growth of the market economy (measured e.g. by Gross Domestic Product). Rising GDP (an economic boom or prosperity) implies that businesses in general see rising profits, increased sales and cash flow, and greater use of existing capacity. This usually implies that profit expectations and business confidence rise, encouraging businesses to build more factories and other buildings and to install more machinery. (This expenditure is called fixed investment.) This may lead to further growth of the economy through the stimulation of consumer incomes and purchases, i.e., via the multiplier effect. Fixed investment in economics refers to an increase in the amounts of real capital goods (real means of production) used in production or to the replacement of depreciated capital goods. ... Gross Domestic Product (GDP), a calculation method in national accounting (see Measures of national income and output) is defined as the total value of final goods and services produced within a countrys borders in a year, regardless of ownership. ... In economics, a multiplier effect – or, more completely, the spending/income multiplier effect – occurs when tom is awesome a change in spending causes a disproportionate change in aggregate demand. ...

The accelerator effect also goes the other way: falling GDP (a recession) hurts business profits, sales, cash flow, use of capacity, and expectations. This in turn discourages fixed investment, making a recession worse (especially when the multiplier effect is remembered). A recession is usually defined in macroeconomics as a fall of a countrys real Gross Domestic Product in two or more successive quarters of a year. ...

The accelerator effect fits the behavior of an economy best when either the economy is moving away from full employment or when it is already below that level of production. This is because high levels of aggregate demand hit against the limits set by the existing labor force, the existing stock of capital goods, the availability of natural resources, and our technical ability to convert these inputs into products. Note also that this principle, like many others in economics, only works ceteris paribus or "all else equal." In plain prose, the accelerator effect may be cancelled out by other economic forces. In economics, full employment has more than one meaning. ... In economics, aggregate demand is the total demand for goods and services in the economy (Y) during a specific time period. ... Ceteris paribus is a Latin phrase, literally translated as with other things [being] the same, and usually rendered in English as all other things being equal. ...

Accelerator models

The accelerator effect is shown in the simple accelerator model. This model assumes that the stock of capital goods (K) is proportional to the level of production (Y): In economics, the distinction is often made between stock magnitudes and flow magnitudes. ... In economics, capital goods refer to real products that are used in the production of other products but are not incorporated into the new product that is derived from the production of the older product. ...

K = k*Y

This implies that if k (the capital-output ratio) is constant, an increase in Y requires an increase in K. That is, net investment, I_n equals:

I_n = k*ΔY

Suppose that k = 2. This equation implies that if Y rises by 10, then net investment will equal 10/2 = 5, as suggested by the accelerator effect. If Y then rises by only 5, the equation implies that the level of investment will be 5/2 = 2.5. This means that the simple accelerator model implies that fixed investment will fall if the growth of production slows. An actual fall in production is not needed to cause investment to fall. However, such a fall in output will result if slowing growth of production causes investment to fall, since that reduces aggregate demand. Thus, the simple accelerator model implies an endogenous explanation of the business-cycle downturn, the transition to a recession. In economics, aggregate demand is the total demand for goods and services in the economy (Y) during a specific time period. ... In an economic model, an endogenous change is one that comes from inside the model and is explained by the model itself. ... An abstract business cycle The business cycle or economic cycle refers to the ups and downs seen somewhat simultaneously in most parts of an economy. ...

Modern economists have described the accelerator effect in terms of the more sophisticated flexible accelerator model of investment. Businesses are described as engaging in net investment in fixed capital goods in order to close the gap between the desired stock of capital goods (K^d) and the existing stock of capital goods left over from the past (K_-1): In economics, net investment refers to an activity of spending which increases the availability of fixed capital goods or means of production. ... In economics, the distinction is often made between stock magnitudes and flow magnitudes. ...

I_n = x*(K^d - K_-1)

where x is a coefficient representing the speed of adjustment (1 ≥ x ≥ 0).

The desired stock of capital goods is determined by such variables as the expected profit rate, the expected level of output, the interest rate (the cost of finance), and technology. Because the expected level of output plays a role, this model exhibits behavior described by the accelerator effect but less extreme than that of the simple accelerator. Because the existing capital stock grows over time due to past net investment, a slowing of the growth of output (GDP) can cause the gap between the desired K and the existing K to narrow, close, or even become negative, causing current net investment to fall. In economics, the profit rate refers to the relative profitability of an investment project or of an capitalist enterprise or for the capitalist economy as a whole. ...

Obviously, ceteris paribus, an actual fall in output depresses the desired stock of capital goods and thus net investment. Similarly, a rise in output causes a rise in investment. Finally, if the desired capital stock is less than the actual stock, then net investment may be depressed for a long time. Ceteris paribus is a Latin phrase, literally translated as with other things [being] the same, and usually rendered in English as all other things being equal. ...

In the Neoclassical accelerator model of Dale Jorgenson, the desired capital stock is derived from the aggregate production function assuming profit maximization and perfect competition. In microeconomics, a production function expresses the relationship between an organizations inputs and its outputs. ... Competition is the act of striving against another force for the purpose of achieving dominance or attaining a reward or goal, or out of a biological imperative such as survival. ...