Velocity of money

Money is the modern economy’s mechanism for pricing and facilitating the flow of goods and services. So the health of an economy can be measured by capturing the speed at which the money available in it (the money supply) is being spent.

When consumers are feeling nervous, they will tend to save, or hoard, cash rather than spend it. Equally, if banks are reluctant to lend, less money is available for spending. That slows down its velocity and can point to trouble ahead for businesses and the wider economy.

One way of measuring velocity across an economy is to look at the ratio of a country’s wealth (gross national product) to its total supply of money. The higher this is, the faster money is likely to be circulating.

Merryn

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