hussen omari
Mar 1
Differentiate between multiplier and accelerator in business cycle?
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Mar 1
Multiplier and accelerator are two concepts that explain the relationship between changes in investment and changes in national income in the business cycle.
Multiplier:
- The multiplier effect refers to the idea that an initial increase in investment or spending will lead to a larger increase in national income.
- It is based on the idea that when businesses invest in new capital goods or infrastructure, this creates income and employment for workers, who in turn spend their income on goods and services, leading to further increases in production and income.
- The multiplier effect is a key concept in Keynesian economics, which argues that government intervention in the economy can help to stimulate economic growth during times of recession.
- The multiplier effect is represented by the formula: Multiplier = 1 / (1 - Marginal Propensity to Consume)
Accelerator:
- The accelerator theory states that changes in the level of investment are driven by changes in the rate of growth of national income.
- According to the accelerator theory, when national income is growing rapidly, businesses are more likely to invest in new capital goods and infrastructure to meet the increased demand for goods and services.
- Conversely, when national income is growing slowly or contracting, businesses are less likely to invest in new capital goods, leading to a decrease in investment and further slowing of economic growth.
- The accelerator effect is a key concept in explaining the fluctuations in investment that occur during the business cycle.
- The accelerator effect is represented by the formula: Change in Investment = Accelerator Coefficient x Change in National Income
In summary, the multiplier effect explains how changes in investment or spending lead to changes in national income, while the accelerator effect explains how changes in national income drive changes in investment. Both concepts are important in understanding the dynamics of the business cycle and the factors that influence economic growth.
Multiplier:
- The multiplier effect refers to the idea that an initial increase in investment or spending will lead to a larger increase in national income.
- It is based on the idea that when businesses invest in new capital goods or infrastructure, this creates income and employment for workers, who in turn spend their income on goods and services, leading to further increases in production and income.
- The multiplier effect is a key concept in Keynesian economics, which argues that government intervention in the economy can help to stimulate economic growth during times of recession.
- The multiplier effect is represented by the formula: Multiplier = 1 / (1 - Marginal Propensity to Consume)
Accelerator:
- The accelerator theory states that changes in the level of investment are driven by changes in the rate of growth of national income.
- According to the accelerator theory, when national income is growing rapidly, businesses are more likely to invest in new capital goods and infrastructure to meet the increased demand for goods and services.
- Conversely, when national income is growing slowly or contracting, businesses are less likely to invest in new capital goods, leading to a decrease in investment and further slowing of economic growth.
- The accelerator effect is a key concept in explaining the fluctuations in investment that occur during the business cycle.
- The accelerator effect is represented by the formula: Change in Investment = Accelerator Coefficient x Change in National Income
In summary, the multiplier effect explains how changes in investment or spending lead to changes in national income, while the accelerator effect explains how changes in national income drive changes in investment. Both concepts are important in understanding the dynamics of the business cycle and the factors that influence economic growth.
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