Page 101 - DECO402_Macro Economics

Macroeconomic Theory

Notes until Y t + 6 period. After it, it starts to
fall. In the lower part of figure, the I
n
curve shows that the pure investment
rises from increasing the production
in t + 4 period because production
is increasing with increasing rate.
But when the production increases
with the decreasing rate between
the periods t + 4 and t + 6 than net
investment is decreasing. When the
production starts to decrease in the
period t + 7 then net investment
becomes negative. Curve In shows
the entire investment of economy.
It’s behave is same as net investment
curve. But there is difference in both
that the entire investment is not
negative and when it becomes zero
in period t + 8 then In curve starts to
move upward. Therefore, because of Figure 11.1
that on being the entire investment
negative, the replacement investment is going on with the same rate in the economy.

Its Criticisms

Economist criticizes it because of the hard assumption of acceleration-rule. Its limitation is
following:
1. Capital-out Ratio not Constant: Acceleration-rule is base on the capital-output ratio. But
its ratio is not constant in modern dynamic world. There are continuous development in
invention and production and in the techniques of production by it the per unit production of
capital logistic increases. Or, present capital logistics can be deep work. Then, the expectation
of businessman is effected more related with prices, wage and interest and capital-production
ratio changed. So, capital-production ratio is not constant but change in different stages of
business-cycle.
2. Resources not Elastic: Accelerate consider that sources are available. Sources should be
flexible so it can use in capital thing industry so it can expand. It is possible only whenever
there is unemployment in economy. But when economy one time reached on the level of
full employment, then the shortage of sources, capital-things industry is not expand. Now
it the operation of the acceleration principle becomes limited.
3. Idle Capacity in Plants: Acceleration principle considers that plants have not unused or excess
capacity. If some machine are not doing work according to their full capacity and becomes
passive, then being the increment in production of customer things, the demand will not
increased for new capital things. In that situation, acceleration- rule will not work. Now, this
principle will not apply in recession because there are more capacity find on it.
4. Difference Between Required and Real Capital Stock: Acceleration-principle is based on
principle that there are no any difference between required and real capital stock and if there
are any difference then it remove in one period. But capital things producing industry already
work on whole capacity then difference can not possible to remove in single period.

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