The accelerator effect (also known as the accelerator coefficient or capital-output ratio) describes how changes in national income lead to changes in investment. It measures the amount of new capital investment a business needs to support an increase in production output.

The Formula: v = Net induced investment / Change in national income = I_net / ΔY

Key features:

• The coefficient (v): This shows how much extra capital is needed to produce one additional unit of output.
• Investment trigger: When national income grows, demand for goods rises. Businesses then invest in new machinery and factories to meet this demand; this process is the accelerator effect.
• Investment volatility: Because investment depends on the rate of change in income rather than the absolute level, even small fluctuations in economic growth can cause large swings in investment spending.
• High sensitivity: A high accelerator coefficient means that small increases in income lead to large increases in corporate investment.
• Interaction with the multiplier: The accelerator works alongside the multiplier effect; rising income leads to more investment, which in turn generates further income, creating a cycle of growth.
• Economic origin: Formalized by economist John Maurice Clark, this theory is a key part of post-Keynesian economic models.