Question

Distinguish between multiplier and accelerator in economics

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.

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.

Answer 2

Multiplier refers to a situation when your final outcome is a multiple of your initial expenditure. This means your income is greater than your expenditure. It depends on three things

• The size of savings ratio

• The amount spend on imports

• Level of taxations

Whereas Accelerator refers to the situation when fluctuations during a trade cycle or business cycle are more than fluctuations in income.