Accelerator Model Overview: The accelerator model is intended to be very similar to multiplier, and, in Keynesian theory, the two are assumed to work together. The accelerator theory of investment basically states that as firms increase their output, the need for greater capital to sustain growth will lead to an increase in desired levels of income.
The accelerator theory of investment does, however, make some large assumptions:
- Assumes that firms’ past output levels form the basis for expectations of future needs for capital, or that investment is assumed to be primarily linked to changes in demand for output rather that to a change in interest rates.
Complete the table for Company A:
Year
Yearly sales
Desired # of Machines
Net Investment
Gross Investment
(Net Inv. + 2)
1
20,000,000
20
0
2
2
20,000,000
20
0
2
3
22,000,000
22
2
4
4
24,000,000
24
5
25,000,000
25
6
25,000,000
25
7
23,000,000
23
-2
0
8
21,000,000
21
9
20,000,000
20
10
20,000,000
20
Now look back at the table:
Calculate percent change in sales (demand) and the percent change in Gross Investment for years 2 and 3. What do you notice?
Compare 3 to 4 and then 4 to 5. What is the change is investment dependent on?
What is happening in years 7 and 8?
How is the accelerator theory useful?
It demonstrates how investment expenditure is related to aggregate demand, but, at the same time, is more volatile, which helps to explain the fluctuations on the business cycle.
It shows us how output must rise as a constant rate for investment to remain the same.
A small decrease in demand can bring investment down rapidly.
Weaknesses:
The theory ignores the fact that firms may increase labor instead of increasing investment in capital. Many businesses operate at excess capacity levels during demand surges. Time-lag issues make it difficult to connect aggregate demand and changes in capital, so the extent to which the theory actually works is unclear. HomeNaked Economics Assignment Jamie,
I looked at your paragraphs quickly and you have improved them. I will add comments this weekend. I would like you to join Michael and George as the Pakistan experts on Tuesday. Please consult the World Bank website for information on Pakistan. The link is
Organize the main points on this wiki page:Jamie--PakisTravels of a T-Shirt in the Global EconomyTEACH the CLASS: Use actual examples from at least one of the Four Parts of Pietra’s book—Texas, China, North Carolina, Africa-- to demonstrate the concept(s) raised in each of the Wheelan chapter. ASSESSMENT: Teach the Class Rubric
1. On the wiki post Power Paragraphs( click for a review of the power paragraph), not more than two, that use compelling evidence from the Pietra text to exemplify the economic concepts described in the Wheelan chapter.
2. Ask open-ended questions which encourage the students to demonstrate that they understand why your example is a practical application of the economic concept. Their engagement indicates their understanding. Be prepared to explain the concept in an alternative way. This is your formative assessment.
3. Each of the six posts should focus on one of Rivoli's four regions.
4. When the project is complete each student will have written paragraphs on all four of the regions--Texas, China, North Carolina, Africa and the content covered will demonstrate that the student read and understands the Rivoli text. This is a summative grade, 100 points.Friday, August 27: Chapter 1, The Power of MarketsSouth Carolina Market PowersIn recent centuries, South Carolina has been both a victim and beneficiary of the global labor market. In what Rivoli refers to as “the race to the bottom” South Carolina has lost over 100,000 jobs in the textile industry as they move to China. In the midst of this loss, companies such as BMW and IBM are filling in the gaps of textile mills and employing the people of South Carolina (Rivoli 119). This situation in the global labor market addresses two essential points introduced by Wheelan. First, “Why did the entrepreneur cross the road? Because he could make more money on the other side.” And second, how can corporations be so successful despite the low wages they pay new workers in different countries? (Wheelan 11, 20).Corporations will always move to regions where the costs of inputs are the cheapest, as described in “the race to the bottom” of the textile industry. In the 1800’s, Southern mills (including those in South Carolina) were the cheapest places to operate in the textile industry. (Rivoli 99-101). The region that could offer the lowest costs, was the region that held the textile industry. South Carolina flourished during this period, until the textile industry sought out even lower costs in Japan and China. At the same time, however, European companies such as BMW and Michelin began to establish plants in South Carolina for cheaper production. This brings up another important point from Wheelan’s chapter about how global companies are able to get away with enforcing such low wages to the companies they set up in. Essentially the answer is that the companies find regions where low wages and poor work conditions are better than everyday life. For instance Nike can pay a Vietnamese worker $600 a year, but still be paying them twice the average salary in Vietnam (Wheelan 21). Rivoli writes that for Chinese girls, “Factory work has provided not only a step up the economic ladder and an escape from the physical and mental drudgery of the farm, but also a first taste of autonomy…” (Rivoli 112). Thus, all corporations have to do when they enter a new country is appear better than the workers’ other options. The same is true for South Carolina workers, given the choice of unemployment or to work for lower wages at BMW. As bad as this situation sounds, Wheelan points out that capitalism is simply not fair, but is the best option among other alternatives (Wheelan 21). Also, South Carolina is proof that, all industries are in a “race to the bottom,” and when one industry leaves a region, others will fill the void.Works CitedRivoli, Pietra. The Travels of a T-shirt in the Global Economy: an Economist Examines the Markets, Power, and Politics of World Trade. Hoboken, NJ: John Wiley, 2009. Print. Wheelan, Charles J. Naked Economics: Undressing the Dismal Science. New York: W. W. Norton, 2010. Print. Jamie, You use Wheelan's ideas effectively to shed light on the labor markets in North Carolina. However, your analysis could benefit from following the rules of the power paragraph. You are packing the paragraph with evidence and the effect is distracting. Make sure that every piece of evidence is followed by a sentence that clearly connects it with your topic sentence. Choose only the citations that precisely support your point. Quality evidence keeps the writing clear and focused. Remember, you are writing to persuade. Tweak this paragraph and I will return to grade it. Tuesday, August 30: Chapter 2, Incentives Matter
South Carolina: "Creative Destruction" and Politics vs Incentives
This paragraph is about the case in South Carolina, where, as textile jobs dwindle, workers are establishing special interest groups to promote protective trade policies in order to reduce the effects of market incentives (Rivoli 144). South Carolina’s problems have their roots in the concept of “creative destruction.” (Creative destruction describes the economic process in which advancements in technology and efficiency cause the loss of jobs and businesses that are no longer needed or efficient.) China offers cheaper and more efficient labor than South Carolina with the incentive being that China will be rewarded with business from the textile industry. This market incentive, however, creates a negative impact on the mill workers of South Carolina who lose there jobs to the more efficient Chinese workers. Thus, in their own self interest the people of South Carolina had an incentive to turn to trade barriers to protect their work. Since the political aspect divorces incentives from productivity, the workers are not punished for their inefficiency (Wheelan 27,36). This is similar to the problem of adverse selection, because rather than being paid according to their quality of work, South Carolinian workers are able to keep their jobs due to political power.
China: Should Government or the Market fix incentive failures? While the Chinese mills may see the incentive to work efficiently, they do not always feel the pressures to work in environmentally or socially responsible ways. This is because the incentives for efficiency often outweigh the incentives for responsibility. This is because, as Wheelan phrases it, “the pocketbook is mightier than the conscience” (Wheelan 28). This means that unless Chinese plants face financial consequences for poor working practices, that they will not change their behaviors. In this case, market incentives can solve this problem. Rivoli points out that, free trade gives the buyers the option to discriminate against products that are unsafe or are produced in non-environmentally friendly ways. When companies such as Wal-Mart and Target begin to phase out T-Shirts with dangerous chemicals in the paint, then, eventually Chinese produces will begin to seek out chemical free paints in order to protect their orders with those buyers. In this instance the market is able to provide appropriate incentives for the firms to correct their behavior (Rivoli 134). In another issue, U.S. tariffs and quotas on China have created “perverse incentives” (unintended incentives that can occur when we try to do something completely different) to create an "underground economy" in which firms falsely labels clothing as being produced in other countries. This undermines the quotas and harms the economies of those other countries (Rivoli 180). This is a scenario in which the Government must correct the incentive failures (as the market cannot control underground economies). The Chinese Government must take on the responsibility of monitoring and fining Chinese factories, so that the mills have an incentive to accurately report where their clothing was made.Thus, both government and the market are capable of correcting certain incentive failures.
NOTE: An underground economy is the illegal activities that individuals and firms undertake in order to avoid taxation or regulation.
Texas: Perverse Incentives Government incentives for Texas Cotton farmers have had extremely negative unintended consequences by creating perverse incentives. The crops are so heavily subsidized and insured by the government, that farmers could make a modest living without ever producing a single bail of cotton. However, rather than settle for a life of laziness the farmers set out to produce as much cotton as possible. This is because, with government subsidies, U.S. cotton growers have a perverse incentive to grow as much cotton as they please without driving down the price they will receive for their cotton (Rivoli 25-48). This is a perverse incentive, because what was intended to protect farmers from the fluctuations of the market, ended up giving them a reason to be as efficient and innovative as possible in effort to maximize their profits (Wheelan 29). This also makes the situations of cotton farmers in other countries worse by driving down global prices of cotton. This is an unintended consequence because in an effort to help U.S. farmers, the government is hurting farmers everywhere else.
Africa: Principal-Agent Problem
The "Principal-Agent problem" occurs when a principal employs an agent, but that agent does not have incentives to do things that work in the favor of the principal (Wheelan 31).Such is the case between African farmers and their government. The cotton farmers make up a very small part of their countries' capitals. The governments of these countries, many of which are corrupt, see very little incentive to aide or subsidize cotton farmers because the farmers bring very little revenue to the nation. What little is given to the farmers is inconsistent and unreliable, and they are left alone to compete with the powerful American cotton farmers who receive about 3x more per pound (Rivoli 45-7). Essentially the African government is like a CEO without stock based incentives (Wheelan 32). The Government has nothing invested in the success of the cotton industry and therefore has no incentive to work in the farmers' favor. The cotton farms need to become a larger part of their nations' economies in order for the governments to feel like they have "stock" in the industry. This will be hard, and likely impossible without outside help.
Works CitedRivoli, Pietra. The Travels of a T-shirt in the Global Economy: an Economist Examines the Markets, Power, and Politics of World Trade. Hoboken, NJ: John Wiley, 2009. Print. Wheelan, Charles J. Naked Economics: Undressing the Dismal Science. New York: W. W. Norton, 2010. Print.
Overall goal: Demonstrate to the year 1 students that economics gives us an analytical framework for thinking about important questions such as incentives. Objectives: 1. Accurately and precisely define the following: adverse selection, perverse incentives, principle-agent problem, the expansion of underground economies. 2. Select compelling evidence from the Travels of the T-Shirt and clearly explain how each example demonstrates one of the four behaviors. When you have exemplified all four concepts make sure that you have used at least one example from Texas, China, North Carolina, and Africa. 3. Post your paragraphs—one for each concept on your wiki before class, 4. Present your examples to the year 1 students.
Wednesday, September 1: chapter 3, "Government and the Economy Jamie, Your homework is to correct these paragraphs tonight. I'll regrade after school tomorrow.
Thursday, chapter 11, "Trade and Globalization Click edit and post your power paragraphs.
Accelerator Model
Overview: The accelerator model is intended to be very similar to multiplier, and, in Keynesian theory, the two are assumed to work together. The accelerator theory of investment basically states that as firms increase their output, the need for greater capital to sustain growth will lead to an increase in desired levels of income.
The accelerator theory of investment does, however, make some large assumptions:
- Assumes that firms’ past output levels form the basis for expectations of future needs for capital, or that investment is assumed to be primarily linked to changes in demand for output rather that to a change in interest rates.
Complete the table for Company A:
(Net Inv. + 2)
Now look back at the table:
How is the accelerator theory useful?
Weaknesses:
The theory ignores the fact that firms may increase labor instead of increasing investment in capital. Many businesses operate at excess capacity levels during demand surges. Time-lag issues make it difficult to connect aggregate demand and changes in capital, so the extent to which the theory actually works is unclear.
HomeNaked Economics Assignment
Jamie,
I looked at your paragraphs quickly and you have improved them. I will add comments this weekend.
I would like you to join Michael and George as the Pakistan experts on Tuesday. Please consult the World Bank website for information on Pakistan. The link is
http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/PAKISTANEXTN/0,,menuPK:293057~pagePK:141159~piPK:141110~theSitePK:293052,00.html
or Search "world bank" and pakistan
Organize the main points on this wiki page: Jamie--Pakis Travels of a T-Shirt in the Global Economy TEACH the CLASS: Use actual examples from at least one of the Four Parts of Pietra’s book—Texas, China, North Carolina, Africa-- to demonstrate the concept(s) raised in each of the Wheelan chapter.
ASSESSMENT: Teach the Class Rubric
1. On the wiki post Power Paragraphs( click for a review of the power paragraph), not more than two, that use compelling evidence from the Pietra text to exemplify the economic concepts described in the Wheelan chapter.
2. Ask open-ended questions which encourage the students to demonstrate that they understand why your example is a practical application of the economic concept. Their engagement indicates their understanding. Be prepared to explain the concept in an alternative way. This is your formative assessment.
3. Each of the six posts should focus on one of Rivoli's four regions.
4. When the project is complete each student will have written paragraphs on all four of the regions--Texas, China, North Carolina, Africa and the content covered will demonstrate that the student read and understands the Rivoli text. This is a summative grade, 100 points. Friday, August 27: Chapter 1, The Power of Markets South Carolina Market PowersIn recent centuries, South Carolina has been both a victim and beneficiary of the global labor market. In what Rivoli refers to as “the race to the bottom” South Carolina has lost over 100,000 jobs in the textile industry as they move to China. In the midst of this loss, companies such as BMW and IBM are filling in the gaps of textile mills and employing the people of South Carolina (Rivoli 119). This situation in the global labor market addresses two essential points introduced by Wheelan. First, “Why did the entrepreneur cross the road? Because he could make more money on the other side.” And second, how can corporations be so successful despite the low wages they pay new workers in different countries? (Wheelan 11, 20). Corporations will always move to regions where the costs of inputs are the cheapest, as described in “the race to the bottom” of the textile industry. In the 1800’s, Southern mills (including those in South Carolina) were the cheapest places to operate in the textile industry. (Rivoli 99-101). The region that could offer the lowest costs, was the region that held the textile industry. South Carolina flourished during this period, until the textile industry sought out even lower costs in Japan and China. At the same time, however, European companies such as BMW and Michelin began to establish plants in South Carolina for cheaper production. This brings up another important point from Wheelan’s chapter about how global companies are able to get away with enforcing such low wages to the companies they set up in. Essentially the answer is that the companies find regions where low wages and poor work conditions are better than everyday life. For instance Nike can pay a Vietnamese worker $600 a year, but still be paying them twice the average salary in Vietnam (Wheelan 21). Rivoli writes that for Chinese girls, “Factory work has provided not only a step up the economic ladder and an escape from the physical and mental drudgery of the farm, but also a first taste of autonomy…” (Rivoli 112). Thus, all corporations have to do when they enter a new country is appear better than the workers’ other options. The same is true for South Carolina workers, given the choice of unemployment or to work for lower wages at BMW. As bad as this situation sounds, Wheelan points out that capitalism is simply not fair, but is the best option among other alternatives (Wheelan 21). Also, South Carolina is proof that, all industries are in a “race to the bottom,” and when one industry leaves a region, others will fill the void.Works CitedRivoli, Pietra. The Travels of a T-shirt in the Global Economy: an Economist Examines the Markets, Power, and Politics of World Trade. Hoboken, NJ: John Wiley, 2009. Print. Wheelan, Charles J. Naked Economics: Undressing the Dismal Science. New York: W. W. Norton, 2010. Print.
Jamie,
You use Wheelan's ideas effectively to shed light on the labor markets in North Carolina. However, your analysis could benefit from following the rules of the power paragraph. You are packing the paragraph with evidence and the effect is distracting. Make sure that every piece of evidence is followed by a sentence that clearly connects it with your topic sentence. Choose only the citations that precisely support your point. Quality evidence keeps the writing clear and focused. Remember, you are writing to persuade. Tweak this paragraph and I will return to grade it.
Tuesday, August 30: Chapter 2, Incentives Matter
South Carolina: "Creative Destruction" and Politics vs Incentives
This paragraph is about the case in South Carolina, where, as textile jobs dwindle, workers are establishing special interest groups to promote protective trade policies in order to reduce the effects of market incentives (Rivoli 144). South Carolina’s problems have their roots in the concept of “creative destruction.” (Creative destruction describes the economic process in which advancements in technology and efficiency cause the loss of jobs and businesses that are no longer needed or efficient.) China offers cheaper and more efficient labor than South Carolina with the incentive being that China will be rewarded with business from the textile industry. This market incentive, however, creates a negative impact on the mill workers of South Carolina who lose there jobs to the more efficient Chinese workers. Thus, in their own self interest the people of South Carolina had an incentive to turn to trade barriers to protect their work. Since the political aspect divorces incentives from productivity, the workers are not punished for their inefficiency (Wheelan 27,36). This is similar to the problem of adverse selection, because rather than being paid according to their quality of work, South Carolinian workers are able to keep their jobs due to political power.
China: Should Government or the Market fix incentive failures?
While the Chinese mills may see the incentive to work efficiently, they do not always feel the pressures to work in environmentally or socially responsible ways. This is because the incentives for efficiency often outweigh the incentives for responsibility. This is because, as Wheelan phrases it, “the pocketbook is mightier than the conscience” (Wheelan 28). This means that unless Chinese plants face financial consequences for poor working practices, that they will not change their behaviors. In this case, market incentives can solve this problem. Rivoli points out that, free trade gives the buyers the option to discriminate against products that are unsafe or are produced in non-environmentally friendly ways. When companies such as Wal-Mart and Target begin to phase out T-Shirts with dangerous chemicals in the paint, then, eventually Chinese produces will begin to seek out chemical free paints in order to protect their orders with those buyers. In this instance the market is able to provide appropriate incentives for the firms to correct their behavior (Rivoli 134). In another issue, U.S. tariffs and quotas on China have created “perverse incentives” (unintended incentives that can occur when we try to do something completely different) to create an "underground economy" in which firms falsely labels clothing as being produced in other countries. This undermines the quotas and harms the economies of those other countries (Rivoli 180). This is a scenario in which the Government must correct the incentive failures (as the market cannot control underground economies). The Chinese Government must take on the responsibility of monitoring and fining Chinese factories, so that the mills have an incentive to accurately report where their clothing was made.Thus, both government and the market are capable of correcting certain incentive failures.
NOTE: An underground economy is the illegal activities that individuals and firms undertake in order to avoid taxation or regulation.
Texas: Perverse Incentives
Government incentives for Texas Cotton farmers have had extremely negative unintended consequences by creating perverse incentives. The crops are so heavily subsidized and insured by the government, that farmers could make a modest living without ever producing a single bail of cotton. However, rather than settle for a life of laziness the farmers set out to produce as much cotton as possible. This is because, with government subsidies, U.S. cotton growers have a perverse incentive to grow as much cotton as they please without driving down the price they will receive for their cotton (Rivoli 25-48). This is a perverse incentive, because what was intended to protect farmers from the fluctuations of the market, ended up giving them a reason to be as efficient and innovative as possible in effort to maximize their profits (Wheelan 29). This also makes the situations of cotton farmers in other countries worse by driving down global prices of cotton. This is an unintended consequence because in an effort to help U.S. farmers, the government is hurting farmers everywhere else.
Africa: Principal-Agent Problem
The "Principal-Agent problem" occurs when a principal employs an agent, but that agent does not have incentives to do things that work in the favor of the principal (Wheelan 31).Such is the case between African farmers and their government. The cotton farmers make up a very small part of their countries' capitals. The governments of these countries, many of which are corrupt, see very little incentive to aide or subsidize cotton farmers because the farmers bring very little revenue to the nation. What little is given to the farmers is inconsistent and unreliable, and they are left alone to compete with the powerful American cotton farmers who receive about 3x more per pound (Rivoli 45-7). Essentially the African government is like a CEO without stock based incentives (Wheelan 32). The Government has nothing invested in the success of the cotton industry and therefore has no incentive to work in the farmers' favor. The cotton farms need to become a larger part of their nations' economies in order for the governments to feel like they have "stock" in the industry. This will be hard, and likely impossible without outside help.
Works CitedRivoli, Pietra. The Travels of a T-shirt in the Global Economy: an Economist Examines the Markets, Power, and Politics of World Trade. Hoboken, NJ: John Wiley, 2009. Print. Wheelan, Charles J. Naked Economics: Undressing the Dismal Science. New York: W. W. Norton, 2010. Print.
Overall goal: Demonstrate to the year 1 students that economics gives us an analytical framework for thinking about important questions such as incentives.
Objectives:
1. Accurately and precisely define the following: adverse selection, perverse incentives, principle-agent problem, the expansion of underground economies.
2. Select compelling evidence from the Travels of the T-Shirt and clearly explain how each example demonstrates one of the four behaviors. When you have exemplified all four concepts make sure that you have used at least one example from Texas, China, North Carolina, and Africa.
3. Post your paragraphs—one for each concept on your wiki before class,
4. Present your examples to the year 1 students.
Wednesday, September 1: chapter 3, "Government and the Economy
Jamie, Your homework is to correct these paragraphs tonight. I'll regrade after school tomorrow.
Thursday, chapter 11, "Trade and Globalization
Click edit and post your power paragraphs.