The rate at which money is exchanged from one transaction to another, and how much a unit of currency is used in a given period of time. Velocity of money is usually measured as a ratio of GNP to a country's total supply of money.
The velocity of money
provides some unique insight into the state of our economy. But exactly what
insight is up for debate. Many people contend that the velocity of money is an
indicator or predictor of inflation; unfortunately it’s not that simple.
First we need to
understand how the velocity of money is calculated so that we have more insight
into what may be driving the changes in velocity. The velocity of money is
calculated as the ratio of nominal GDP to the amount of money in circulation.
In
sum, all we can really say with regard to the velocity of money is the
following:
· It increases when GDP rises faster
than the money supply, or when GDP falls slower than the money supply
· It decreases when GDP rises slower
than the money supply, or when GDP falls faster than the money supply