Velocity of Money Formula

Formula to Calculate the Velocity of Money

The velocity of Money refers to the frequency with which a unit of the currency can be exchanged for purchasing the goods and the services that are manufactured domestically during the specified time period i.e.,  it is a number of times the money movement is there from one of the entities to another entity.

The formula for the Velocity of Money can be calculated:

The velocity of Money = NGDP/AM   

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For eg:
Source: Velocity of Money Formula (wallstreetmojo.com)

Where,

Examples

You can download this Velocity of Money Formula Excel Template here – Velocity of Money Formula Excel Template

Example #1

Consider the nominal GDP of country Y is $2,525 and the average amount of the money circulation in the economy is $1345. Based on the above information you are required to calculate the Velocity of Money.

Solution

We are given both the Nominal Gross Domestic Product and Average money circulation, we can use the below formula to calculate the Velocity of Money. Use the below-given data for calculation of the velocity of money

 Example 1

Therefore, the calculation of the velocity of money is as follows,

Example 1.1png

=2525.00/1345.00

The velocity of money will be –

Velocity of Money Formula Example 1.2
  • The velocity of money = 1.8773

Therefore, the velocity of money is 1.8773.

Example #2

St. Marteen is a very small island near the Caribbean island. The average population on the island is 41,109 as per the latest census data available. Assuming that the average amount of money kept per individual per month is $1,000. The Nominal GDP of the country per latest publicly available data is $1.394 billion. The finance minister was asked to calculate the money velocity of the country as the average growth has not crossed 2% for some of the last periods. The minister was advised to increase the supply of money in the economy if the money velocity is below 50.

Based on the above details you are required to calculate the Velocity of Money and comment on whether more printing of the money would be required?

Solution

We are given the Nominal Gross Domestic Product as $1.394 billion and average money circulation will be calculated per below:

Average Circulation of Money can be calculated using the below formula as,

The average amount of money per person in the economy x population of the country

Velocity of Money Formula Example 2

=41109.00*1000.00

  • Average Circulation of Money =41109000.00

Therefore, the calculation of the velocity of money is as follows,

Velocity of Money Formula Example 2.1

=1394000000.00/41109000.00

The velocity of money will be –

Velocity of Money Formula Example 2.2
  • Velocity of Money = 33.91

Therefore, the velocity of money is 33.91 and since it is below 50, the country will be required to print more money.

Example #3

Economy Z is a special economy and due to the recent war, it has got destroyed and two individuals after 3 months of war ended have decided to start the business. One person named X has started a business of food and another person named Y has started the business of clothing. Following transactions have taken place during 1st month of that year when initially they had $300:

  • X purchases food for $150 from Y.
  • X purchases food again for $150.
  • Y then purchases cloth from X for $200.
  • Y then purchases cloth for his family from X for $100.

They continue these transactions for the next 11 months as well.

Based on the above information you are required to calculate the velocity of money for this economy where currently only 2 traders are there.

Solution

The Nominal GDP would be $300 x 12 which is $3,600 as a nominal GDP. The average money that the economy had was $300.

Example 3

Therefore, the calculation of the velocity of money is as follows,

Velocity of Money Formula Example 3.1

=3600.00/300.00

The velocity of money will be –

Example 3.2
  • The Velocity of Money = 12

Therefore, the velocity of money is 12.

Calculator

You can use this velocity of money formula calculator

Nominal Gross Domestic Product
Average amount of money that circulates in the country
Velocity of Money Formula
 

Velocity of Money Formula =
Nominal Gross Domestic Product
=
Average amount of money that circulates in the country
0
= 0
0

Relevance and Uses

The 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. 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. Take an example, when there is an increase in the supply of the money that should theoretically also lead to a price increase commensurately as there is more supply of the money which shall be chasing a similar level of services and goods in the country.

Then there will be vice versa with a decrease in the supply of money. 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.

 If the supply of money is increased, but there is a decrease in velocity, then GDP might even decline or stay the same. If the supply of money is not increased but the money velocity has increased, then the GDP could rise.

Recommended Articles

This has been a guide to the Velocity of Money Formula. Here we discuss the formula to calculate the velocity of money along with practical examples and downloadable excel template. You can learn more about economics from the following articles –

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