Accelerator Effect and Economic Growth - Chains of Reasoning

Here is a short video building logical chains of analytical reasoning for a question on the accelerator effect.

Question: Analyse how the accelerator process is likely to affect economic growth.

Example of a logical analytical chain of reasoning

• A positive accelerator effect occurs when an increase in the rate of growth of consumer demand leads to a rise in planned capital investment by businesses.
• For example, rising demand for streaming services might lead businesses such as Netflix and Disney+ to increase investment in server hardware.
• Business will increase capital spending because they need extra supply capacity and want to make higher profits in the long run.
• As a result of an increase in net investment, the size of a country's capital stock will rise and the amount of capital per worker employed will also grow.
• This will lead to an expansion of a nation's productive potential especially if higher investment also drives an improvement in labour productivity (efficiency).
• This will then contribute to an increase in the long-run trend economic growth of a country as shown by an outward shift of LRAS and/or an outward move in the PPF.