Reply To: Velocity of Money, of Trading


It’s tough to answer your question without knowing more context. There is the famous “equation of exchange” that says:


or earlier it used to be written


where M was money stock, V was “velocity of circulation” (i.e. how many times per period a unit of money changed hands in a transaction), P was average price level, Q was quantity of real output, and T was number of transactions.

So if V goes up, but we don’t assume there is more output of “real” goods and services, then that just makes P go up.

But if (say) you are assuming that the price level stays the same, and V goes up, then (if M stays the same) it has to be that actual economic output increases.

You could tell stories in which this makes sense. E.g. if the internet allows for buyers and sellers to “find each other” more easily, then more mutually-beneficial trades can occur per year, and we are genuinely richer.