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Quantity Theory of Money

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The quantity theory of money is an important tool for thinking about issues in macroeconomics. The equation for the quantity theory of money is: M x V = P x Y What do the variables represent? M is fairly straightforward – it’s the money supply in an economy. A typical dollar bill can go on a long journey during the course of a single year. It can be spent in exchange for goods and services numerous times. In the quantity theory of money, how many times an average dollar is exchanged is its velocity, or V. The price level of goods and services in an economy is represented by P. Finally, Y is all of the finished goods and services sold in an economy – aka real GDP. When you multiply P x Y, the result is nominal GDP. Actually, when you multiply M x V (the money supply times the velocity of money), you also get nominal GDP. M x V is equal to P x Y by definition – it’s an identity equation. You can think about the two sides of the equation like this: the left (M x V) covers the actions of consumers while the right (P x Y) covers the actions of producers. Since everything that is sold is bought by someone, these two sides will remain equal. Up next, we’ll use the quantity theory of money to discuss the causes of inflation. Subscribe for new videos every Tuesday! http://bit.ly/1Rib5V8 Macroeconomics Course: http://bit.ly/1R1PL5x Ask a question about the video: http://bit.ly/2jvcIbq Next video: http://bit.ly/2k0ZCny
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Text Comments (77)
Hatime Yusif (2 days ago)
يا جماعه وش الهرجه ؟
Yoni Destray (1 month ago)
Thank you guys
Amir Estebari (1 month ago)
Excellent! Thank you so much for sharing this and explaining the concept much better than my course book.
Dipu Faimul (2 months ago)
Magnificent man. You are awesome.
Sreerag K (5 months ago)
Wow!!
Takashi Murakami (5 months ago)
Because V and Y are almost uncontrollable, the macroeconomy are controlled by manipulating M and P which are done by a small elite people, creating bigger and bigger inequality between rich and poor
MEK (6 months ago)
I guess the real question is how do you measure V?  How do we know how and when someone has spent money?  That relies on Gov't.
Adriano Mattia (6 months ago)
MEK Imagine an economy where total spending is 100$ and there are only 20$. This means that the 20$ have been spent 5 times, in other words V is equal to 5. You just divide nominal gdp by the money supply and you get to velocity, simple as that.
Petter Gustafsson (7 months ago)
How is Y Real GDP? Usually you use the price levels of 2009 in order to get real GDP. In this video they are refering real GDP as the value of all products and services in a year, which is technically just nominell GDP? Can someone explain please? But good video I must say!
nino27 (3 months ago)
The real GDP you are talking about is the nominal GDP adjusted for inflation. It used prices in a base year to neutralize inflation effects on GDP figures. Here the real GDP is an abstract concept and is really supposed to really reprennent all goods and services actually bought in an economy in a given period.
Shubham Jain (7 months ago)
Best
Thanks a lot man. It really helped me because I had to present about this topic for an assignment.
TheRealNoodles (8 months ago)
Quantity theory of money is outdated. Doesn't work like that in the real world. I use to work in a bank. What they taught me in university was useless because i saw the real banking. Not the theory banking.
norepetitivebeats (16 days ago)
@A one legged man - TheRealNoodle is correct here. I suggest you watch 97% Owned (see link below) as it clearly sets out how and where money actually comes from. https://www.youtube.com/watch?v=d3mfkD6Ky5o
Angus MacDonald (1 month ago)
TheRealNoodles, what did you do at "the bank"? What was their AUM? What country was this bank in? What type of bank was it? When was this? Where was this? What did you study at university? Where did you go to university? And why did you believe your critique was necessary to this video? I apologize if I come across as condescending with the barrage of questions but I am legitimately curious. I myself had around 2 years at a "decently" sized bank (post fin cri 08) and I do feel like it is relevant for individuals (especially economists or branches thereof) to know this information. DM my dude let's talk!
nino27 (4 months ago)
TheRealNoodles just because you didn't see it while working in banking doesn't means it isn't real or whatever you are trying to say. The central bank actions and policies have real effects that can be modeled with good accuracy. And nobody said the central bank can control money supply at will.. It can't even measure it anyway. Also the TQM is an identity, it's not right or wrong it is true by definition
A one legged man (8 months ago)
not true. no goods to buy does not lead to inflation . germany printed more money to pay off debts
TheRealNoodles (8 months ago)
freddo 1614 war, government instability, destroyed farms/factories hence no goods to buy leading to inflation. QTM doesn't recognize these factors.
Evgeniya Z (9 months ago)
I learned today what is pupusa! I heard it first time!!!🔊🤔
Mehrin Ali (9 months ago)
Thank you so much!
Max Teitelbaum (1 year ago)
I don't understand why money times velocity is equal to nominal gdp. Anyone could explain me this?
Biyaheng Poolitss (2 months ago)
+Amit Kumar M xV
Amit Kumar (2 months ago)
+kate c what they taught earlier was M X V..but now they are using M + V..how is it possible? please explain
kate c (11 months ago)
M x V = P x Y P x Y = Nominal GDP Therefore, M x V = P x Y = Nominal GDP Remember that to find nominal GDP you multiply real GDP (Y) by the price index or price level (P) which is the formula P x Y. Since the formula M x V is identically the same as the formula P x Y this is why money times velocity equals nominal GDP. The amount of money in circulation (M) times the number of times each dollar is spent (V) is equal to nominal GDP because velocity (V) is the number of times each dollar is spent on *final goods and services* . Remember that's how we define nominal GDP - the total value of all sales of final goods and services before adjusting for inflation. Total money times the amount of times the money is spent on final goods equals the total value of sales of goods and services. For example, if there are 10 dollars in circulation (M=10) and each dollar is spent 5 times (V=5), 10 x 5 = 50. So the total amount of money spent on final goods and services would be $50 which would be the nominal GDP - the total value of the sale of all final goods and services before adjusting for inflation.
AMAN Deep (1 year ago)
Thamk you
Sarthak Arora (1 year ago)
learning is fun
frenzy pasta (1 year ago)
Dear lord, this is the best thing i saw in my entire semester. Thank you!
prasanna dhital (1 year ago)
sir iam preparing for examination of Nepal Rastra Bank.Its a Central reserve bank of Nepal and i believe your videos will help me a lot .
HerbWitGames (1 year ago)
I do a level economics and i cry about the state of the uk's econimical factorial equivalent of Asian workers
A one legged man (8 months ago)
you should try a level learn english
Stefan Spinu (1 year ago)
lovely! really cool video!
Jonah Smith (1 year ago)
What would Ludwig Von Mises say about this? I thought money was simply a medium of exchange which took the inconvenience of not finding someone willing to trade their goods for your goods out of direct bartering. I don't know why the velocity of money would matter to the health of an economy or to the gross domestic product. It's production and trade that show overall economic health, right? I never could make sense of the Keynesian economic rationale and fiat currency. If you need to use force to get people to use your currency what does that say about its actual value?
Adriano Mattia (3 months ago)
john smith and i'm not claiming that i am...
john smith (3 months ago)
neither are you the owner of the economy.
Adriano Mattia (3 months ago)
john smith No, i'm not against that. If l'm the owner of the road i can set rules that you have to accept if you want to use it. That's not what force is.
john smith (3 months ago)
you also need to use force to get people to not drink and drive or use their cellphones while driving. Are you against that aswell??
nino27 (4 months ago)
It's because ppl fall prey to monetary illusions, a concept that Keynes introduced. Classics an Austrian live in a perfect world where prices and wages would always self ajust. In reality wages and prices can not ajust because ppl don't care about real wages
TheGerogero (1 year ago)
I want a pupusa. :F
Abdul Ahad Shabbir (1 year ago)
With reference to (almost) 2:44...do credit cards really count as money? n how do they affect the currency printing process...they do accelerate the spendings and thus GDP, is there effect also considered when printing hard cash?
TheRealNoodles (8 months ago)
Credit card is not money. It is a borrowed promissory note that a bank is willing to put on its balance sheet. The asset of the credit card user increases, the liabilities of the card issuer increases too. Printing hard cash has a purpose. To complete transactions.
kate c (11 months ago)
Credit cards don't count towards the money supply, however the money borrowed on credit from the bank (credit) will count toward the sale of final goods and services, which in turn affects the value of GDP (Y). Debitable/checkable accounts do count as money (M). The reason for this is because the money in your checkings/savings account can be converted back to actual physical currency at any point, whereas credit is where the whoever the credit card is through (usually a bank) has paid for the goods and services but with the promise you will eventually pay them back with real money, also generally with interest, as there would be no incentive to loan you money without receiving some type of return.
Leo Ware (1 year ago)
I am a little bit confused. Is Y supposed to be number of items sold? In the video, I think they said that it is equal to "Real GDP" as opposed to "Nominal GDP". What does this even mean?
kate c (11 months ago)
Y = Real GDP P x Y = Price index times real GDP Remember that to find nominal GDP you multiply real GDP (Y) by the price index or price level (P) which is the formula P x Y. This is why the formlula M x V is identically the same as the nominal GDP.
Leo Ware (1 year ago)
Okay, thanks.
Hi Leo, I recommend heading on over to the beginning of the Macro course. We define GDP and explain the difference between nominal and real GDP in the first four videos. Here's a link to the playlist: https://www.youtube.com/watch?v=mjJmo5mN5yA&index=1&t=9s&list=PL-uRhZ_p-BM52EbMG1NR1ZfG9tEvcxE4u Hope that clears it up! -Meg
Andre Angelo (1 year ago)
Ugh, so annoying I have to wait to see the next video. I have already seen all of the videos on this channel ahahaha
jtothe k (1 year ago)
Thanks, love you guys. Keep up the awesome job! I always watch your new videos.
Great to hear. Any topics you'd like to see us cover? -Roman
Andre Angelo (1 year ago)
by the way, I LOVED Econ Duel!
Andre Angelo (1 year ago)
Well, it was quite a hyperbole from me hahaha But I can say I've spent some hours in econo-marathons here on your channel. Thanks for your videos, they are really interesting!
Andre! We're working hard to keep the tap flowing. Have you seen all of Micro? Everyday? Money Skills? Econ Duel? Thanks for watching. -Roman
Yippie37 (1 year ago)
Wow, still posting videos, and one I was really interested in, thank you!!!
We post new videos every Tuesday! :) -Meg
Jesse (1 year ago)
Read up. Quantity theory of money does not work in reality.
nino27 (4 months ago)
Jesse it's an identity, it is true by definition
Ayaan Saeed (1 year ago)
Hi, can you please explain why (M×V) is NGDP formula. Thanks in advance.
Amit Dethe (1 year ago)
you are simply the best
Narissa Jeffrey (1 month ago)
better than all the rest...
User665 (1 year ago)
We've studied this equation in relation with inflation and unemployment, m is the cause of inflation, government spending to boost employment is halted by the structural unemployment which thenly causes stagflation, and more money drowning the economy leading to skyrocketing prices and ultimately more inflation and more unemployment
nino27 (4 months ago)
User665 the limiting factor is productivity not employment though

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