Velocity of money

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The velocity of money measures how many times 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 changes hands, or circulates to other owners in return for valuable goods and services. The concept relates the size of economic activity to a given money supply. The velocity of money is one of the variables that determine inflation. The velocity of money is usually measured as 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, transactions occur more frequently. The velocity of money changes over time and is influenced by many factors. Because of the nature of financial transactions, economists cannot determine the velocity of money empirically.

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