The velocity of circulation of money is the frequency with which each currency is used to sell goods and services for a certain period of time (year, quarter, month). In other words, it is the number of revolutions made by money in circulation and used to buy finished goods and services.
Instructions
Step 1
If you want to determine the velocity of money circulation, refer to Fisher's equation of exchange. The sought value will be determined by the formula V = PQ / M, where P is the average level of prices for goods and services, Q is the volume of goods and services sold in the period under review (in physical terms), M is the average money supply in circulation.
Step 2
The indicator of the rate of money turnover determined in this way characterizes the level of intensity of using the stock of money in circulation to pay for goods and services sold. This indicator is closely related to money circulation and depends primarily on the frequency and volume of commodity transactions carried out by each economic entity. However, non-commodity payments (budget, credit, etc.) can affect the speed of money circulation. This is especially noticeable with the average rate of turnover of funds, which consists of the duration of keeping money at the disposal of buyers of goods and services and the duration of their stay in the budget system, banks, etc. If money is retained by the second group of subjects, then the duration of the turnover of funds increases, therefore, the speed of circulation decreases.
Step 3
The speed of circulation of money can be determined in another way, namely, by the average frequency of the turnover of a monetary unit in payment of income of the population, i.e. in creating national income. It is calculated as the ratio of the volume of national income to the mass of money in circulation.
Step 4
In addition, the velocity of circulation of money can be found by the average frequency of use of the currency in the implementation of all payments. In this case, it is defined as the ratio of the total volume of money turnover and the stock of money in circulation.
Step 5
The speed of circulation can also be determined by the frequency of passage of cash through the cash desks of banks. It is calculated by dividing the total cash turnover of all banks by the average annual amount of cash.
