This year 1 macroeconomics topic video looks at the basics of the accelerator effect - a relationship between the rate of growth of real national income and planned capital investment.

What is the accelerator effect?

• The accelerator effect is a relationship between planned capital investment and the rate of change of national income
• Consider an industry where demand is rising quickly
• Firms may respond initially by using their existing capacity more intensively or running down stocks of finished products
• If they expect high demand will be sustained – they may increase spending on plant and machinery, factories and new technology in order to increase their supply capacity
• This causes an accelerator effect – where a given change in demand for consumer goods and services will cause a bigger percentage change in demand for capital goods