There are 2 ways to calculate nominal GDP, p*Q or M(money in circulation)*V(velocity)- This is called equation of exchange The velocity of money refers to the amount of times a unit of currency is transferred within a given period. The velocity of money is measured by dividing the level of nominal GDP by the number of money in supply(the monetrist assumes that v is constant and increase in MS will increase nominal GDP)e.g lets assume that our Q= 50 and p = 18 and our M = 84. our V= (50*18)/84 = 5. The monetarist assumes that this 5 is constant, let assume M increased by 50. our M will now be 134(84+50). Our nominal GDP = M*V = 134*5 = 670; remember the old GDP =420, so the difference between the 2 GDP(old/new) = 250 which is the same as multiplying the increase in MS of 50 by the V=5(50*5) = 250. Nominal GDP = M*V The Cambridge k refers to the length of time we hold onto our money before we spend it The Cambridge k is calculated by k=(1/V)*365 The higher the Velocity the lower the K and the lower the Velocity the higher the K. Velocity cause the lenght of time we hold our money to change.
Dr Stephanie Powers,"Monetary Policy"(Lecture notes, Donald School of Business, Red Deer AB, Winter 2012)
Investopedia, "Velocity of Money" Accessed April 14 2012 ( http://www.investopedia.com/terms/v/velocity.asp)
There are 2 ways to calculate nominal GDP, p*Q or M(money in circulation)*V(velocity)- This is called equation of exchange
The velocity of money refers to the amount of times a unit of currency is transferred within a given period.
The velocity of money is measured by dividing the level of nominal GDP by the number of money in supply(the monetrist assumes that v is constant and increase in MS will increase nominal GDP)e.g lets assume that our Q= 50 and p = 18 and our M = 84. our V= (50*18)/84 = 5. The monetarist assumes that this 5 is constant, let assume M increased by 50. our M will now be 134(84+50). Our nominal GDP = M*V = 134*5 = 670; remember the old GDP =420, so the difference between the 2 GDP(old/new) = 250 which is the same as multiplying the increase in MS of 50 by the V=5(50*5) = 250. Nominal GDP = M*V
The Cambridge k refers to the length of time we hold onto our money before we spend it
The Cambridge k is calculated by k=(1/V)*365
The higher the Velocity the lower the K and the lower the Velocity the higher the K. Velocity cause the lenght of time we hold our money to change.
Dr Stephanie Powers,"Monetary Policy"(Lecture notes, Donald School of Business, Red Deer AB, Winter 2012)
Investopedia, "Velocity of Money" Accessed April 14 2012 ( http://www.investopedia.com/terms/v/velocity.asp)