Economics
Equation of Exchange
The Equation of Exchange is a fundamental concept in economics that expresses the relationship between the money supply, the velocity of money, the price level, and the level of real output in an economy. It is represented as MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the level of real output. This equation is used to analyze the factors influencing the overall level of economic activity and inflation.
Written by Perlego with AI-assistance
Related key terms
1 of 5
4 Key excerpts on "Equation of Exchange"
eBook - ePub- Murray N(Author)
- 2014(Publication Date)
- Editorial Bubok Publishing(Publisher)
PT, our original equation. Thus, Fisher’s attempt to arrive at a quantity equation with the price level approximately proportionate to the quantity of money is proved vain by yet another route.A group of Cambridge economists—Pigou, Robertson, etc.—has attempted to rehabilitate the Fisher equation by eliminating V and substituting the idea that the total supply of money equals the total demand for money. However, their equation is not a particular advance, since they keep the fallacious holistic concepts of P and T, and their k is merely the reciprocal of V, and suffers from the latter’s deficiencies.In fact, since V is not an independently defined variable, M must be eliminated from the equation as well as V, and the Fisherine (and the Cambridge) equation cannot be used to demonstrate the “quantity theory of money.” And since M and V must disappear, there are an infinite number of other “equations of exchange” that we could, with equal invalidity, uphold as “determinants of the price level.” Thus, the aggregate stock of sugar in the economy may be termed S, and the ratio of E to the total stock of sugar may be called “average sugar turnover,” or U. This new “Equation of Exchange” would be: SU = PT, and the stock of sugar would suddenly become a major determinant of the price level. Or we could substitute A = number of salesmen in the country, and X = total expenditures per salesman, or “salesmen turnover,” to arrive at a new set of “determinants” in a new equation. And so on.This example should reveal the fallacy of equations in economic theory. The Fisherine equation has been popular for many years because it has been thought to convey useful economic knowledge. It appears to be demonstrating the plausible (on other
eBook - ePubMoney and Abstract Labour
On the Analytical Foundations of Political Economy
- Ulrich Krause, Jon Rothschild, Pete Burgess(Authors)
- 2020(Publication Date)
- Verso(Publisher)
Since N is linked to the quantities of commodities through the equation N = y · p, it follows that y · p = M · υ (relative to a given transaction-structure and a localization), the quantity equation for money. This equation often arises purely by definition, in which case it is a tautology. But that is not the case here, since the two sides of the equation have mutually independent meanings. The components of the left side, the vectors y and p, are defined independently of those of the right side, and the definition of υ relates solely to M and S, and not to the transaction value N = y · p. The equation states that a sum of money M with a mean transaction number υ (which depends in general on the transaction-structure and in particular on the localization of M) is sufficient to effect transactions of a given (total) transaction value. This may or may not be the case, and as we have already seen, with the same sum of money M it may be true for one transaction-structure with a given localization, but not for others. (The operative definition here is that of υ as, in which neither y nor p plays any role.) In subsequent discussion, the connection expressed in the quantity equation between y and p on one side and M and υ on the other will be adopted as a basis, if the sum of money is sufficient. This connection will often be used to establish a relationship between the sum of money and prices and, when exchange-ratios are fixed, between the sum of money and the level of prices. Some relationship, of course, does exist—namely the quantity equation (when the sum of money is sufficient)— but a closer, more causal one is meant here: an increase in M leads to a proportional increase in all prices. The core of this connection can be formulated as follows: a doubling (or halving) of the sum of money entails a doubling (or halving) of prices. 11 The first example above, in which n = 3, can be taken to test this proposition
eBook - ePubEconomics Through the Looking-Glass
Reflections on a Perverted Science
- R.A. Rayman(Author)
- 2019(Publication Date)
- Taylor & Francis(Publisher)
As long as the preferences of Dums and the Dees do not alter, the desired proportions between goods and money can be maintained only by pressure to spend. Excess demand in the product markets cannot be eliminated completely, until prices have risen sufficiently to reduce the purchasing power of the money balances (the “real balances”) to their initial value. After the 25% increase in their money balances, equilibrium cannot be restored until prices have increased by 25%.It appears, therefore, that equilibrium following a change in the quantity of money, cannot be restored until there has been a proportional change in the level of prices. Uncle Milton is delighted. The experience of the Dums and the Dees provides the evidence he needs to support one of his favourite theories.The Quantity Theory of Money
As Great Uncle Gerard used to say, “The Moneyes of Chriftendome , which haue their ebbing and flowing, doe fhew their operation vpon Commodities, making by Plenty , the price thereof deare, or by Scarcity better cheape” [Malynes (1622) p.36].Uncle Irving’s “Equation of Exchange” [Fisher (1911) p.27] looks more scientific:In the Looking-Glass Utopia, aggregate real balances of 150,000 units support aggregate purchases of 120,000 units, so the velocity of circulation ÎS ⅘. With the quantity of money at its initial total of £600,000, the Equation of Exchange is:the quantity of Money in circulation (M) multiplied by its Velocity of circulation (V) is equal to the level of Prices (P )multiplied by the volume of Transactions (T )or MV = PT.(M) £600,000 X (V)⅘ = (P) £4.00 x (T ) 120,000.When the aggregate quantity of money is increased to £750,000, the equation becomes:(M) £750,000 x (V)⅘ = (P)£5.00 x (T ) 120,000.As Uncle Irving explains, “the quantity theory asserts that (provided velocity of circulation and volume of trade are unchanged) if we increase the number of dollars ... prices will be increased in the same proportion” [p.3l].Uncle Milton congratulates himself on having demonstrated the first law of economics with a perfect object lesson. Pieces of paper, however beautifully engraved, will not enable the Dums and the Dees to consume that which they have not produced. They have to rely on their own efforts. It should be a constant reminder that no government, however well- intentioned, can improve living standards simply by printing and distributing bundles of paper. The only way to economic prosperity is by creating real goods and services through the effort of production.
eBook - PDF- Imad A Moosa, Razzaque H Bhatti(Authors)
- 2009(Publication Date)
- World Scientific(Publisher)
In both cases, however, the system works best if variables respond to the markets on which they exert the most direct influence. The relative effectiveness of fixed and flexible exchange rates can be illustrated by examining equilibrium conditions in the market for goods and foreign exchange. Equilibrium in the former is reached when the current world demand for domestic goods is equal to the current supply (or equiv-alently the excess of domestic saving over domestic investment is equal to the trade surplus). 7 Deflationary pressure arises in the economy when the excess of domestic saving over domestic investment exceeds the trade surplus, whereas inflationary pressure arises when excess saving falls short 7 This can be illustrated by using the national income equilibrium condition in which the sum of injections into the circular flow of income (investment, government expenditure, and exports) is equal to the sum of withdrawals from it (saving, taxes, and imports). Hence, I + G + X = S + T + M , where I is the investment, G is the government expenditure, X is the exports, S is the saving, T is the tax revenue, and M is the imports. By rearranging the equation and assuming that T = G , we can derive an equation setting the condition that for equilibrium in the markets for goods and foreign exchange, the excess of domestic saving must be equal to the trade balance. This is written as S − I = X − M . 38 The Theory and Empirics of Exchange Rates of the trade surplus. Similarly, equilibrium in the foreign exchange market is reached when foreign exchange payments are equal to foreign exchange receipts, or equivalently when net capital exports (lending) are equal to the trade surplus. In the absence of equality between foreign exchange pay-ments and receipts, a balance of payments surplus or deficit would arise, depending on whether lending is greater or less than the trade surplus.
Index pages curate the most relevant extracts from our library of academic textbooks. They’ve been created using an in-house natural language model (NLM), each adding context and meaning to key research topics.
