Eye Crosser #10: The Velocity of Money

You’ve heard of wind velocity? The weather man may refer to it when reporting on hurricanes or violent storms.  If not, here’s a definition:

The horizontal direction and speed of air motion.

Dictionary of Military and Associated Terms. S.v. “wind velocity.” Retrieved August 29 2015 from http://www.thefreedictionary.com/wind+velocity

Well, how about the velocity of money? Have you heard of that? No! Got you there, right! Well, here’s the “skinny” on the velocity of money.

The rate at which money is exchanged from one transaction to another, and how much a unit of currency is used in a given period of time. Velocity of money is usually measured as a ratio of GNP to a country’s total supply of money.

Read more: Velocity Of Money Definition

The velocity of money was one of the many, many concerns of financial and economic professionals during the Great Recession. During that multi-year world-wide disaster, it was the lack of velocity or the slowness of rate of money exchanged, that concerned everyone. Notice from the above definition that the velocity of money is used to compute the Gross National Product (GDP). Here’s my “By the Numbers” posting about GDP.

The Federal Reserve Bank of St. Louis (Missouri) is a district (or branch) bank of the Federal Reserve Bank. They have created a short 12-minute video  Money and Inflation. The video discusses the velocity of money, inflation, plus gives examples of the “value” of money. Wow, it’s complicated! That’s why I’m calling this another Eye Crosser topic! Enjoy.

Author’s Addendum on 9/13/15: I found a very detailed explanation (dated year 2010) and example of the “velocity of money by Paul Kedrosky quoting John Mauldin: Mauldin the Velocity of Money. It’s rather lenghty with charts. Enjoy!

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Slowly
Recharge

Numbers #2: Gross Domestic Product or GDP

Put simply, GDP is a broad measurement of a nation’s overall economic activity. Source: Investopedia.com

Now here’s an economic indicator that can say  “one thing one minute” and then revise it (the numbers) at some future date. And, it’s OK to do so…   GDP is an example of an economic indicator that can be and “is” revised or adjusted after its “numbers have been officially released by the U.S. Department of Commerce, Bureau of Economic Analysis. Revisions to GDP are expected as a matter of course because the very nature of the GDP calculation is the summary of many different aspects of the national economy.

Investopedia.com has a very short video that explains the calculation of GDP.

Here’s a link to CNBC announcing a second quarter revision to the second quarter 2015 GDP report. It’s an example of how complicated the GDP measurement really is to calculate.

The GDP calculation tries to determine “are we, as a nation,  growing or not”. Is our economy expanding or contracting at a particular point in time.

Indicator Name:          Gross Domestic Product (GDP)

Published by:              U.S. Department of Commerce, Bureau of Economic analysis

Publishing Calendar:   Monthly with revision releases as needed or necessary

Website:                      http://www.bea.gov/index.htm

Author’s Addendum (9/13/2015): CNBC has a nice summary of the function of GDP written by Mark Koba, see Gross Domestic Product: CNBC Explains.

Rationale for the By the Numbers blog postings.