Accelerator Effect

The accelerator effect in economics refers to a positive effect on private fixed investment of the growth of the market economy (measured e.g. by a change in Gross National Product). Rising GNP (an economic boom or prosperity) implies that businesses in general see rising profits, increased sales and cash flow, and greater use of existing capacity. This usually implies that profit expectations and business confidence rise, encouraging businesses to build more factories and other buildings and to install more machinery. (This expenditure is called fixed investment.) This may lead to further growth of the economy through the stimulation of consumer incomes and purchases, i.e., via the multiplier effect.

The accelerator effect also goes the other way: falling GNP (a recession) hurts business profits, sales, cash flow, use of capacity and expectations. This in turn discourages fixed investment, worsening a recession by the multiplier effect.

The accelerator effect fits the behavior of an economy best when either the economy is moving away from full employment or when it is already below that level of production. This is because high levels of aggregate demand hit against the limits set by the existing labor force, the existing stock of capital goods, the availability of natural resources, and the technical ability of an economy to convert inputs into products.