Monday 261012

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.

PART 10 Money and Prices in the Long Run

Chapter 29 of 36 Money Growth and Inflation

Section 10 of 29

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Figure 3 - Nominal GDP, the Quantity of Money, and the Velocity of Money

This figure shows

· the nominal value of output as measured by nominal GDP

· the quantity of money as measured by M2 (see Figure 1)

· the velocity of money as measured by their ratio

Velocity of money is how many times in a year each dollar is spent.

For comparability, all three series have been scaled to equal 100 in 1960.

Over this period

· nominal GDP and the quantity of money have grown dramatically, by more than twenty times

· velocity has been relatively stable

…

In the following and next section:

Y = production quantity, in this example how many pizzas are produced and consumed, 100

P = price level, here the price of pizza, $10

M = money supply, quantity of money in the economy, here $50

V = velocity of money, how many times in a year each dollar is spent, here 20

…

Imagine a simple economy that produces only pizza

· the economy produces and consumes 100 pizzas a year, Y = 100

· price per pizza is $10, P = $10

· quantity of money in the economy is $50, M = $50

Since 100 pizzas are produced/consumed per year, the velocity of money is

V = Y x P / M = ($10 x 100) / $50 = 20

In this economy (Y x P) = 100 x $10 = $1,000, is spent per year on pizza.

For this $1,000 of spending to happen with only $50 of money supply each dollar must change hands 20 times per year on average.

… …

twenty times per year on average

heikin shite nenkan nijū-kai

平均して年間二十回