model is based on an assumption of a stable (or fixed) capital to output
ratio. It stresses that planned investment is demand induced. That is, the
demand for new plant and machinery comes from the demand for final goods and
expected demand (output) is higher than the present capacity of the firm then
additional plant and equipment may be required. Thus investment is a function
of the rate of change in national income. A slowdown in the growth of
consumer or export demand may actually cause the demand for planned capital
investment to fall. Investment spending is usually more volatile than changes
in national output as a whole. The accelerator theory offers one explanation
for this volatility.
There are some
limitations of the accelerator model.
Firstly, even if demand does increase, this change
may be perceived as transitory and therefore the firm may have no incentive
Secondly, firms may not have to invest if they are
operating with spare capacity and can meet an increase in demand by using
existing inputs more intensively or with greater efficiency.
Thirdly the model assumes that firms are responding
to changes in demand when they adjust the size of their capital stock. In
reality most firms adjust their planned investment to predicted future levels
of demand (they have forward looking expectations).