accelerator and multiplier Flashcards
lots of blank cards don't be fooled dawgy x
what is the accelerator theory
Theory that states that level of I in an econ is directly related to the rate of change in gdp (econ growth rate)
So an increase in the rate of econ growth will cause a large change in level of I
what is gross investment
total amount that the economy spends on new capital. This figure includes an estimate for the value of capital depreciation (replacing worn out capital) since some investment is needed each year just to replace technologically obsolete or worn-out plant and machinery.
what is net investment
If gross investment is higher than depreciation, then net investment will be positive. This means that businesses will have a higher productive capacity and can meet rising demand in the future.
Net investment is the total amount of money that a company spends on capital assets, minus the cost of the depreciation of those assets.
why may investment only produce constant gdp?
if real GDP is constant, the only investment which takes place may be replacement investment (that needed to replace worn out capital goods).
whats the negative accelorator effect
when the rate of growth of demand in an industry slows then net investment of businesses fall
whats the multiplier effect (u got dis gng x)
An initial change in aggregate demand can have a greater final impact on the level of equilibrium national income.
how do the accelerator theory and multiplier effect link
the initial increase in demand (through the multiplier) creates conditions where firms, driven by the accelerator, invest more to meet the new demand. Together, they create a feedback loop that drives further economic growth.
what are weaknesses of accelerator theory
doesnt account for time lags
Firms have may have spare capacity and so rising output may not require extra I.
Many other factors influence the level of investment e.g interest rates
