ABSTRACT
The demand for capital equipment is a derived demand; it is, in fact, a function of the rate of change of sales of the goods which the capital equipment itself produces. In other words the operation of the acceleration principle lies behind the demand for new real capital, and the simplest specification which corresponds to such a hypothesis is a behavioural equation in which investment is a linear function of changes in sales. Moreover, the present tax regulations with regard to depreciation expense tend to reinforce this interpretation. Though firms obviously vary in their treatment of depreciation, the rules applied by the inland revenue ensure that tax relief is only given on depreciation expense which is related to a standardized rate of depreciation for different types of equipment. Variations in capital intensity might mean that an increase in sales would cause a different proportional increment to capital stock in one industry than it did in another.
