Velocity of money

The velocity of money measures the number of times that one unit of currency is used to purchase goods and services within a given time period. In other words, it represents how many times per period money is changing hands, or is circulating to other owners in return for valuable goods and services. The concept relates the size of economic activity to a given money supply. The speed of money exchange is one of the variables that determine inflation. The measure of the velocity of money is usually the ratio of a country's or an economy's nominal gross national product (GNP) to its money supply.

If the velocity of money is increasing, then transactions are occurring between individuals more frequently. The velocity of money changes over time and is influenced by a variety of factors.

Because of the nature of financial transactions, the velocity of money cannot be determined empirically.

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