velocity of circulation

velocity of circulation The ratio of some aggregate of transactions, for example GDP, to some measure of the money supply, for example M1. The ratio of money held to the value of total transactions can vary, but monetary economists have argued that such changes depend on changes in monetary institutions, and can thus be expected to take place only gradually. There are, however, reasons to doubt this. Even including only transactions on income account, there are normally several transactions per unit of GDP, as firms buy factors in one set of markets and sell their products in others, and there are many sales of fuel, materials, and components. The main scope for variations in the velocity of circulation, however, is the large amount of transactions on capital account, trading in shares, bonds, and currencies. There is no reason why the volume of capital account transactions should bear any fixed relation to GDP, and many money balances are held primarily to finance capital market transactions.