Velocity of money
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.
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.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
-
Is mental load driving the widening gender pensions gap?The pension gap may be getting bigger, but it has little to do with the lack of financial literacy and more to do with the mental load women carry
-
MoneyWeek news quiz: How much are the Beckhams worth?Quiz The Beckhams, inflation, unemployment, and house prices all made the news this week. How closely were you following the headlines? Test yourself in MoneyWeek’s news quiz.
