The velocity of money can be defined as the speed at which money flows in an economy. Thus, the Velocity of money is simply calculated by dividing the money supply with the economy’s GDP. Thus Velocity of Money= GDP ÷ Money Supply. On another hand, some critics argue that the velocity of money is not very stable that it keeps on changing, and prices shall be resistant to change, which shall result in an indirect link and weaker link between the inflation and supply of money in the short time period.This has been a guide to the Velocity of Money Formula.
Therefore, the calculation of the velocity of money is as follows, =2525.00/1345.00. The economy that shows faster movement in money can be considered as a healthy economy. Generally, the velocity of money aims to reduce taxes. Velocity of Money Calculation. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. Velocity of money is never constant.The change in money velocity is mainly due to two reasons:Thus, the Velocity of money is simply calculated by dividing the money supply with the economy’s GDP.Certain factors that influence the velocity of money are Value of money, Volume of trade, Frequency of the number of transactions and Credit facilities Business Conditions among others.Let’s take an example to understand the calculation of the Velocity of Money Formula in a better manner.We have studied the basic theory and definition of the Velocity of Money in the above segment. Let us now understand how the velocity of money works by studying a few examples.We assume that Jack sells a pen and Jim sells pencils. Now there is some debate about the proper measurement of the money supply. On Day one, Jack decides to buy pencils from Jim worth $200 this is the first transaction that takes place between them. The same kind of transactions happens throughout the year making the GDP to $4800 and the velocity of money for the year to 24.Velocity of Money is calculated using the formula given belowSimilarly, the velocity of money can be calculated for the remaining years. Here we discuss the formula to calculate the velocity of money along with practical examples and downloadable excel template. This was because each dollar was spent on new goods and services.The velocity of money helps economists to determine the rate of inflation by studying and analyzing the increase or decrease in velocity of money. Graphical representation of the above is shown below –We see that the velocity of money increased after 2008 and decreased drastically in 2011. This means higher the velocity of money lower is the tax rates.Money velocity can be determined by both the demand for money and the supply quantity of money. ALL RIGHTS RESERVED. On Day 2, Jim decides to buy pens from Jack worth $200. The average money that the economy had was $300.Therefore, the calculation of the velocity of money is as follows,You can use this velocity of money formula calculatorThe economists are of differing opinions whether the velocity of money concept can indeed be used to measure the country’s health or, the inflationary pressures, to be more specific. If the money kept is idle or if people hold on cash and do not spend the velocity of money decreases.Please note that a decrease in the velocity of money is not a sign of concern. The higher growth of money supply is in compared to the growth in the economy is an indicator of growing inflation.Velocity of Money is calculated using the formula given belowSimilarly, the velocity of money can be calculated for the Grocer and Doctor.We have calculated a simple velocity of money between a farmer, doctor, and grocer which determines the flow and movement of money between individuals. Some of the monetarists who argue that during changing expectations, the money velocity can remain stable, but when there is the change in the supply of the money that shall alter the market expectations and henceforth inflation and money velocity would also be impacted.
Certain factors that influence the velocity of money are Value of money, Volume of trade, Frequency of the number of transactions and Credit facilities Business Conditions among others.
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how to calculate velocity of money with price level