The late and great Milton Friedman told us that inflation is always and everywhere a monetary phenomenon. But there is an asterisk to his equation that we need to examine, namely, the velocity of ...

The two elements of the velocity of money formula are GDP and the money supply. Economies with a higher velocity of money than others are more established.

The velocity of money gives an important indication of the overall health of an economy. Here, we explain what the velocity of money is, the formula to calculate it and why it is important to traders.

The velocity of money gives an important indication of the overall health of an economy. Here, we explain what the velocity of money is, the formula to calculate it and why it is important to traders.

Based on the formula in the beginning of the post, this situation means that even a slight increase in the velocity of money can have a significant effect on the growth of the nominal GDP.

Stated as an equation, it is Y=MV, where Y is the nominal gross domestic product (not inflation-adjusted here), M is the money supply, and V is the velocity of money.

MV = PY, that’s the formula for the theory of money. M is the quantity (or supply) of money, V is the velocity of money, P is the price level and Y is the aggregate economic output.

Assuming we can quantify both money and total spending, we end up with velocity. But this does not tell us why velocity might vary: all we know is that it must vary in order to balance the equation.

The quantity equation then implies that P must be proportional to M. This reasoning supports the assertion of Milton Friedman (1912–2006) that inflation is caused by increases in the money supply.

The velocity of money peaked around 1980 a period when interest rates hit 20%. It has been declining ever since.