Question

diffrence between multiplier and accelerator

Answer 1

Multiplier

The multiplier refers to the phenomenon whereby a change in an injection of expenditure (either investment, government expenditure or exports) will lead to a proportionately larger change (or multiple change) in the level of national income i.e. the eventual change in national income will be some multiple of the initial change in spending.

We need to be aware that changes in any of the components of AD (e.g. investment) may have a larger effect on GDP than just the value of the change. This is known as the multiplier effect. Let's look at what may happen if there was an injection of extra money into government provided health care in an economy. Certainly, some of the money will go to doctors and nurses in the form of a salary increase or to employ new doctors and nurses, but new building and equipment will probably also be bought. This will boost sales of those making such items and so allow them to consume more. This 'first round effect' is the big boost to spending within the economy.

However, doctors eat, drink and consume just like the rest of us and they too will spend some of their salary increase. The producers of the goods and services they buy will take on more labour and these people will spend part of their salary and so it goes on. The amount that is passed on will diminish in each successive round of spending but the overall injection into the economy will be greater than the first sum that was put into it. The size of the multiplier can be worked out by dividing the increase in national income that eventually occurs by the increase in injections that caused it

Accelerator

We have already looked at how economies tend to grow in cycles - we called this the trade cycle or business cycle. One of the major factors contributing to this cycle is the instability of investment. When the economy is doing well, firms will invest to provide the extra capacity they need for increased production. However, when growth starts to slip, firms will tend to stop investing - in fact investment may become negative. Why invest if there is no need for extra capacity and you cannot even sell what you are currently making! The changes in investment during the different phases of the trade cycle may therefore be several times that of the rise or fall in income.

So we can see that investment depends not so much on the level of income and consumer demand, but on their rate of change. Firms are investing to provide production capacity and so they will invest according to how much demand is growing, not according to the actual level of demand. This link between investment and the rate of change of demand is called the accelerator theory. Fluctuations in investment will be much greater than those in income, but because investment is an injection into the circular flow of income they will have a multiplied effect and this will magnify the ups and downs of the trade cycle.

The accelerator principle states that changes in the level of current income, leading to changes in output of consumer goods, will lead to proportionately greater, or accelerated changes, in the output of capital goods, i.e. investment.