Page 103 - DECO402_Macro Economics

Macroeconomic Theory

Notes goods industries. But it can explain the turn point of upward more good expect of the downward
turn point. To understand the cyclical fluctuations Samulson, Hicks and Goodwin mix the acceleration
and multiplier for the analysis of income breeding.

Self Assessment

Multiple choice Questions:
3. Capital stock will……………..by any change in production
(a) change (b) unchanged
(c) profit (d) loss
4. Being constant the replacement investment, gross investment will……. ……according to
every level of production.
(a)unchanged (b) change
(c) harmful (d) profitable.
5. Capital stock will…………..by any change in production.
(a) change (b) unchanged
(c) loss (d) none of these
6. Net investment is fast……………………………………by the increment in production.
(a) decrement (b) increment
(c) loss (d) none of these.

11.2 Role of Accelerator as a Theory of Investment

According to the theory of acceleration, investment demand is depend on the increment of production
because by increment in production firms inspired that it has been increased the stock of capital things.
Change in production and clear relation in investment is depending on the capital-production ratio
(∆I/∆Y) mean v = ∆I/∆Y, where v is the accelerator and ∆Y is the change in production and ∆I is the
change in investment.
Actually lees the theory of acceleration tells us that the change in capital stock is equals to the v
multiplications of the change in production. Means ∆I = n∆Y, in that principle the value of accelerator
always consider more than one so the increment of net investment always more than the increment
in production.
In a economy three kinds of investment is found-Gross, replacement and net investment. Gross
Investment = replacement investment + net investment. If we assume replacement investment is
constant then gross investment will change with every stage of production.
In the theory of acceleration, net investment or induced investment is related to production. The
formula of net investment I = ∆Y and replacement investment (R) collects in both side in the formula
t
nt
of net investment for know the gross investment. So gross investment is, I = v + ∆Y R.
gt t
The work in the form of investment theory of accelerator is explained with the help of above table 1
and figure 11.1. Some of the things are cleared from it.
First, the rule of accelerator shows the relation in production and investment.
Second, the change in investment because of the change in production, it is more than the change in
production.

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