Question

acceleration principal assumption

Answer 1

 if demand for consumer goods increases, then the percentage change in the demand for machines and other investment necessary to make these goods will increase even more (and vice versa).

Answer 2

Restrictive Assumption # 1. No Excess Capacity in Consumer Goods Industries:

If there is already excess capacity in the consumer goods sector, a rise in demand for consumer goods will not lead to any induced investment or acceleration effects, because the increased demand may be met from the existing capital and machinery without producing additional capital goods.

This will be a case of zero gross investment and is the typical case during the initial period of recovery phase of the trade cycle.

When there is idle equipment or excess capacity, it is only after this excess capacity has been used that the principle of acceleration will start operating. This is what happened in India in Paper, Textile, Sugar and other industries during the Second World War.

Restrictive Assumption # 2.Surplus Capacity in Investment Goods Industries:

On the other hand the operation of the principle depends upon the presumption that there is surplus capacity in the investment goods industries. If it were not so, i.e., no excess capacity existed in machine-making industries, an increase in the derived demand for machines would not induce an increased supply of machines.


Restrictive Assumption # 3.Nature of Demand:The increase in the demand for consumption goods must be more or less permanent in nature to have acceleration effects. A purely temporary increase in the demand for consumer goods will not lead to any addition in the capital goods

Restrictive Assumption # 4.Capital-Output Ratios:

The principle of acceleration is based on the assumption that there is a constant ratio of the output of consumer goods and capital equipment needed for their production i.e., there is constant capital output ratio. In reality this ratio is not necessarily constant.

When there is a heavy pressure of demand for consumer goods apart from the inventions and improvements in the technique of production (which allow for an increase in output per unit of capital equipment), existing capital equipment may be worked more intensively.


Restrictive Assumption # 5.Availability of Resources:

The working of the investment accelerator principle is further restricted by the availability of resources and the ability of the machine-making industry to produce more-machines. In order that the increased demand for capital goods be followed by an increase in production there must be enough unemployed resources available for employment in the capital goods industries i.e., these industries should be able to expand.


Restrictive Assumption # 6.Elastic Credit Supply:

The elastic supply of credit is another factor which helps in the smooth working of the investment acceleration principle. Whenever there is induced investment as a result of induced consumption, enough credit should be forthcoming for investment in investment-goods industries.

Restrictive Assumption # 7.Fluidity:

Operation of the acceleration is also based on the assumption that the investment-goods industry is in fluid condition. It assumes that “…. finished goods are turned out as fast as wanted and materials and means of production are instantly supplied as fast as the process of finishing requires them.” There is no loss of production in time.