What Is Accelerator Theory?

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The accelerator theory states that he net investment is related to he rate of change of mental national income. if growth of net investment increases, consumption will increase and firms would want to increase their productive capacity . According to accelerator theory a change in the rate of growth of demand for consumer goods will cause a greater percentage change in demand of capital goods. Lets take an example; f in one year demand for consumer goods from one firm with eight machines rises from $800 to $900 the firm will order one machine if then the demand rise at a faster rate from $900 to $1300 the firm will now order and extra four machines. While demand for consumer goods rises by 25 percent demand for capital rises by 400 percent. Accelerate theory tells us how it can accentuate change in national income however a change in rate of growth o national investment will not always cause a greater percentage change in demand for capital goods. There are a number of reasons for why investment will not always cause such a change.

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