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The Multiplier vs. Accelerator Effect

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    Hi, can someone tell me the difference between the multiplier and the accelerator effect please?

    Thanks.
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    (Original post by iLoveApple)
    Hi, can someone tell me the difference between the multiplier and the accelerator effect please?

    Thanks.
    The multiplier effect says that an initial injection of £x into the circular flow of income will lead to an increase of GDP greater than £x. This is argued because when that injection is spent it becomes somebodies wages. Some of this is saved. Some of it is spent. This new spending is another injection which becomes another persons income. Because some of the money is saved on each cycle the amount gets smaller and small.

    The magnitude of the multiplier is \dfrac{1}{Marginal Propensity to Consume}

    Mathematically this is a geometric progression.

    The idea of the accelerator is that amount of investment from firms is determined by the rate of growth. This is because firms look at the growth rate and assume that it will continue. Thus demand will increase. Therefore they invest so that they can meet future demand.
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    multiplier is about changes in GDP, accelerator about changes in investment.

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Updated: January 13, 2012
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