Velocity of Money Calculator

Created by Rahul Dhari
Reviewed by Steven Wooding
Last updated: Jun 18, 2022

The velocity of money calculator determines how many times the money moves between the population or a group of people. It is a concept of economics that affects the money supply, demand and inflation. The velocity of money is a function of the gross national product and the money supply. The money supply refers to the amount of money currently in circulation in the economy. As an individual spends money by purchasing services or goods from another individual, the money moves from person to person.

As the second individual spends that money on something else, this loop continues, and money keeps circulating. You can apply the concept of velocity of money to determine how many times the money has changed hands in this process of transferring money and considering it over a given time and group of individuals.

The velocity of money is connected to an equation of exchange that also factors in the expenditure index and is also a part of the quantity theory of money. You can begin by inputting some numbers in the calculator or reading on to understand what the velocity of money is and how to calculate the velocity of money.

What is the velocity of money? — Velocity of money equation

The velocity of money, by definition, is the number of times all the money in the economy has been circulated. Consider a small group of 4 people. A factory owner gives $1000 as salary to his worker.

  • The worker uses that money to shop at a local supermarket and pays $1000 to the supermarket owner.
  • The supermarket owner uses that money to restock his shelves and pays $1000 to the wholesaler or supplier.
  • The supplier who uses the warehouse owned by the factory owner pays the rent for the warehouse of $1000.

In the above group of 4 people, the total transactions made were of value worth $4000. However, the total money in circulation or supply is only $1000. Therefore, money changed hands 4 times per unit time, say, an year.

Movement of money from person to person.
Movement of money from person to person.

Mathematically, the velocity of money formula is:

Vt=TM\quad V_t = \frac{T}{M}

where:

  • TT – Total sum of all the transactions;
  • MM – Money supplied or circulated; and
  • VtV_t – Velocity of money.

The sum of all transactions is the product of the volume of transactions, NN, and the price index, PP.

T=NP\quad T = NP

In a broader perspective, the velocity of money is the ratio of a country's gross national product and the money supply in the country. If the velocity of money is higher, one can conclude that the money is being used to purchase goods and services at a faster rate.

How to calculate velocity of money

To calculate the velocity of money:

  1. Enter the price index, PP.
  2. Fill in the volume or the number of transactions, NN.
  3. The calculator will return the sum of all transactions, TT.
  4. Insert the amount of money in circulation, MM.
  5. The calculator returns the velocity of money, VtV_t.

Example: Using the velocity of money calculator

Calculate the velocity of money if the price index is $15 with 6 transactions in a year. Take the money in circulation as $30.

To calculate the velocity of money:

  1. Enter the price index, P = $15.
  2. Fill in the volume or number of transactions, N = 6.
  3. The calculator will return the sum of all transactions, T = $90 .
  4. Insert the amount of money in circulation, M = $30.
  5. Using the velocity of money formula:
Vt=15×630=3/year\qquad V_t = \frac{15\times6}{30} = 3/\text{year}

FAQ

What do you mean by velocity of money?

The velocity of money is the number of times the total money supplied into the economy is circulated or has changed hands. It is the ratio of the gross national product or the sum of all transactions to the amount of money in circulation per unit period of time.

How do I calculate velocity of money?

To calculate the velocity of money:

  1. Multiply the volume of transactions with the price index to obtain the sum of all transactions.
  2. Divide the sum of all transactions by the money supply in the economy to obtain the velocity of money per unit time, say, an year.

What are the factors affecting velocity of money?

The factors affecting the velocity of money are:

  • Number or frequency of transactions;
  • Demand of goods and services;
  • Value of money; and
  • Type of economy.

The expanding type of economy where the demand of goods is higher results in a higher velocity of money compared to a contracting one.

What is quantity theory of money?

It is a concept in macroeconomics that relates the money and goods value. The quantity theory of money states that the price index of goods and services depends on the amount of money in circulation or being supplied.

For instance, if the money in the economy is increased, the prices for goods will also go up proportionally, which would result in inflation. In other words, the increase in the supply of money will reduce its value.

Rahul Dhari
Price index (P)
$
Volume of transactions (N)
Sum of all transaction (T)
$
Amount of money in circulation (M)
$
per year
Velocity of money (Vt)
per year
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