Speed of money. Definition and calculation of this indicator

The velocity of circulation of money is represented by the average frequency of the use of a monetary unit for the acquisition of new goods, services in a particular period of time. In many respects, this indicator depends on economic activity with the current money supply. In determining the specific time interval, the velocity of circulation of money is represented by a number.

It is quite easy to imagine the calculation of this indicator on a concrete example. For example, imagine a private economy with a money supply of 500 rubles and with the presence of two business entities: a farmer and a mechanic who carry out several transactions each year. So, the farmer pays the mechanic 500 rubles to repair the tractor. The mechanic purchases grain for 400 rubles, and also pays the farmer 100 rubles for the inspection and feeding of his pets. Thus, the total value of all transactions is 1000 rubles, and each ruble was used twice a year. That is why the speed of circulation of money is two per year.

The turnover of money is represented by the manifestation of the essence of money in their movement. It also covers the process of exchange and distribution. The volume and structure of turnover is affected by production and consumption.

So, a long production process, which requires an increase in production reserves, significantly increases the turnover of money associated with such an acquisition. And the output of products that are highly labor-intensive, increases the money turnover precisely in the payment of labor and, as a consequence, increases the monetary incomes of the population, which are later directed to consumption.

One of the components of the indicator in question is the payment turnover, in which money can be used as a means of payment to pay off arising obligations. This turnover can be carried out both in cash and non-cash forms.

Summing up what has been said, we conclude that money should be in constant movement between such basic subjects of economy: state bodies, legal and physical persons. It is their movement in various forms (cash and non-cash) that forms the speed of circulation of money.

Under the state bodies are understood as controlling, fiscal authorities, and the National Bank. As commercial entities, commercial banks can participate in monetary circulation.

The issued mass of money in circulation forms an issue, which may be primary, carried out by the central bank, and secondary (issuance of deposit money from commercial banks).

Another way to replenish the money supply in circulation is the system of tracking the budget debt, which is based only on the placement of government debt securities on the securities market.

With the sale of such securities, the state carries out a money loan from the entities of the financial system and draws up them as the state debt of the country. Acquiring state obligations, the Central Bank directly increases circulation of the money supply and forms the basis for the subsequent issue of deposit offers of commercial banks.

As indicated, the issuers of the money supply can be commercial banks, which form deposits, providing loans to citizens or business entities. When the loan is provided, the money supply grows, and when the loan is repaid, it decreases. The emergence of this effect of money issuance can be successful when a commercial bank purchases government securities on the stock market (only in this case, state obligations can turn into cash). But an additional issue can take place when the bank purchases foreign currency.