What is velocity of money?

Economy and Finance

10 Aug 2023 Zinkpot 152

Velocity of money can be defined as the speed at which money flows or is exchanged in an economy.
In other words, it can be said that it is the speed at which money is spent in an economy for the purpose of buying goods and services.
A high velocity means that currency in an economy is moving quickly and frequently exchanging hands as people spend their money on goods and services. This high velocity reflects a high demand for products and can be interpreted as a sign of an expanding economy.
When the velocity is low, it’s the opposite. Instead of circulation through spending, money is resting in savings and investments. This low velocity indicates a shrinking economy. For economists, it may be an early warning sign of a decline in production motivated by falling demand for products.
The financial velocity rate in an economy can be calculated by dividing the GDP by the total amount of currency available to use for purchasing i.e. the money supply.
The velocity of money impacts inflation, GDP growth, government policy, and portfolio strategy. The key insight of this velocity is whether businesses and consumers are saving or spending away.
A high velocity of money is a classic inflation indicator. Higher money velocity can cause inflation, while a lower velocity results in decreasing inflation.