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. Multiplier Effect: The exogenous spending multiplier is the ratio of a change in national income to any autonomous change in spending (private investment spending, consumer spending, government spending, or spending by foreigners on the country's exports) that causes it. When this multiplier exceeds one, the enhanced effect on national income is called the multiplier effect. The multiplier effect also goes the other way and falling autonomous spending may decrease the national income manifolds. The mechanism that can give rise to a multiplier effect is that an initial incremental amount of spending can lead to increased consumption spending, increasing income further and hence further increasing consumption, etc., resulting in an overall increase in national income greater than the initial incremental amount of spending. In other words, an initial change in aggregate demand may cause a change in aggregate output (and hence the aggregate income that it generates) that is a multiple of the initial change.

Modern Theory of trade cycle: Modern theory of trade cycle was explained by J.R. Hicks in 1950. The theory states that it is interaction of multiplier and accelerator which bring change in gross national income. According to multiplier when investment increases, it increases the income. But income increases more than the size of multiplier e.g. if the value of multiplier is 5 and investment is of 100 will raise national income by Rs.500 etc. The increase in income further leads to greater investment through the accelerator effect. The stock of capital depends upon the level of income, if the income level is higher. The capital assists will also be higher. When the demands for consumer goods increase, it will affect the demand for capital goods. So we find that investment first effect the income then income effects investment. When net investment increases, the income rises in a greater proportion depending upon the size of multiplier. The expansion phase of trade cycle stars when the investment increases. The recession phase starts when the investment falls which ultimately reduce, output and employment in the country and depression phase sets in.