Money and GDP

1
Money and GDP

• Lets Roll

2
Gross Domestic Product

• GDP total final transactions the total value
  of goods services purchased
• Nominal GDP (Y) keeps current prices as they are
  and therefore contains inflation
• Real GDP (y) keeps prices constant at some level
  and therefore records only output and its changes
• But Y Py (P the price level).

3
Money Velocity

• Velocity (V) of circulation the average number
  of times a currency unit gets spent per time
  period
• If the money stock 1000 and average velocity
  6, the money stock finances 6000 in spending
  during the year

4
More of the Same

• MV 10006 6000 total amount of money
  spent
• M includes dollars that never get spent (in a
  piggy bank or safe deposit box) as well as
  dollars that get spent very often
• Some dollars do a lot of work others just sit
  somewhere
• Kind of like people

5
Velocity and Vacations

• Even hard working dollars get some time off
• If V 6 per year, the average dollar relaxes two
  months between jobs in the market
• Where do they take their vacations? In pockets,
  purses, bank accounts all of the above

6
A Useful Equation

• If MV total money spent per year,
• Py Y total GDP purchased in the year since
  total spending total sales, then
• MV Py
• In accounting, double entry would assure that
  this is true

7
MV Py

• V can change, but normally very slowly
• y can change but growth rates rarely get to 10
• Because H gt M, H gt P
• The central bank determines the price level
• The central bank, or rapid changes in H M are
  always the causes of inflation

8
Percentage Changes

• Mathematically,
• ?M ?V ?P ?y
• But if V y dont change very much, ?V ?y
  0, or almost
• Hence, ?M ?P

9
But V y are not constant

• y grows, sometimes very rapidly, and M must grow
  with it
• V changes, sometimes abruptly, especially if
  there is danger of inflation
• Well take these matters up in the next slide show