I am not an economist but I am trying to track down and understand an economic principal (and/or theory) that I think is called "transaction frequency" but when I go searching on that term I find only similar phrases so obviously I am in error. Below is the best way I can describe what I am looking for.

This is related to what is commonly called in the media "wealth inequality".

I remember about a year ago seeing a video that talked about the economy and how transactions (buy/sell exchanges) help it. Sadly I cannot find that video (and if it used invalid terminology maybe that is a good thing).

What the video presented was that there is a spectrum of transactions defined by the two variables of transaction size and transaction frequency. The video asserted that wealthy individuals (top 20% of the population) tend to make transactions that are large in size but relatively few in the scheme of things (such as multi-million dollar investment buys). Conversely, the video asserted that individuals in the vast majority (80%) of the population mostly make small size transactions in fairly high frequency (i.e.: tens of millions of every day retail & service purchases). Finally the video asserted that it is each transaction -- no matter what size -- that "benefits" the economy and that this means that more money in more hands causing more transactions is much more beneficial to the economy than the relatively few large investments.

Now like I said I am not an economist so I do not know if these assertions are accurate or accepted. I do not even understand exactly how a transaction "benefits" the economy. However if I am ever to achieve understanding then I need to know what it is I am trying to research and thus this question.

Thank you for any information on this matter.

PS: I have often heard statements like "Each 1 dollar spent generates an additional X.XX dollars in economic activity." (Is there a name for this concept?) so perhaps that is what the video was attempting to suggest as the "benefit" of each transaction?

  • $\begingroup$ It would be great if you could find the video. The research on this area (empirical or theoretical) seems to be very minimal. The only bits I found (but still far from the issue) are this paper on how the number of spending transactions have fallen in the US, and this one about how buying locally would lower inequality. BTW, I think this is a superb question! Someone should do research on this! $\endgroup$ – luchonacho Aug 12 '17 at 8:57
  • $\begingroup$ I think the video is stating that small transactions have a higher velocity (i.e. the money circulates quicker) than large transactions. That makes sense. Large transactions are often investments that takes months or even years. Buy something in the neighbourhood store and the money will be back in circulation within days or weeks. $\endgroup$ – Klas Lindbäck Sep 11 '17 at 11:18
  • $\begingroup$ Regardless of whether what you remember from the video is theoretically and/or empirically correct: Are you talking about "velocity of money"? $\endgroup$ – nathanwww Apr 9 '18 at 15:27
  • $\begingroup$ I'm not sure how this got bumped but thank you. It does seem that velocity of money is the terminology I needed (thank you ThisIsNoZaku and nathanwww) but as @luchonacho stated there does not seem to be a lot of research material on this (or at least not much that is intellectually accessible to the non-economist layman).I hope the Community can help. I will be here to answer questions every day or two (my work is keeping me very busy so I can't be here at SE as much as I normally am). Thank you in advance. $\endgroup$ – O.M.Y. Sep 9 '18 at 3:30

The only actual question I could glean from this seems to be:

How do transactions benefit the economy?

In economics, the value of goods and services is their utility, an abstract measure of how useful they are. The food a restaurant or grocery store sells provides utility by providing nutrition and the pleasure of eating. A car or public transportation provides the utility of ease of movement. A doctor gives the utility of medical care, etc.

In economies with money, money as a medium of exchange provides potential utility. Your money gives you the ability to perform trades with other people, gaining the utility of their goods and/or services, in exchange for them being able to do the same with someone else later.

Whenever a transaction occurs, the party providing the good or service earns a profit by charging more money than they spent on labor, raw materials, etc. The consumer, meanwhile, gains a sort of utility surplus which is the difference between the amount of money spent and the maximum amount they would be willing to spend.

If a fast food restaurant spends \$2.50 to make a burger that they sell to me for \$5, but which I would be willing to pay a maximum of \$7.50 for, after the transaction the restaurant has \$2.50 more than before they began the process to make the burger, while I have gained an amount of utility I would have been willing to spend \$7.50 to gain having only spent \$5. Both parties are enriched.

Not 100% of transactions are mutually beneficial. Sometimes sellers erroneously set their prices too low to earn a profit, sometimes buyers misjudge the value of something and spend more than they should have, sometimes a party is tricked or coerced into making bad decisions. But the vast majority of them are, which is why they keep happening.

As for your P.S., there is the concept of the velocity of money, essentially the rate that money is exchanged for goods and services. When most transactions are beneficial, the more that occur the better as a general rule. If I have $1 and do nothing with it, no one benefits because money is merely potential utility unless I use it for emergency toilet paper or something. If I spend it, both I and the person I give it to (probably) benefit and when they spend it they and the third party benefit and so on. This is one of the reasons certain individuals support government-mandated transfers of money between different segments of society, arguing that the group the money is taken from doesn't use it enough.

  • $\begingroup$ Thanks for the above information. While I need to do some reading on the terms/concepts you provided I think you may have unintentionally answered my primary question (What is the right name for "transaction frequency"?) in the secondary part of your answer: velocity of money. $\endgroup$ – O.M.Y. May 14 '17 at 13:12
  • $\begingroup$ Using your burger example: If I buy 1,000,000 of those 5 buck burgers the restaurant makes 2,500,000 profit and I gain 2,500,000 potential utility. That is roughly a 50% plus for each side of the transaction. Plus of course the suppliers of meat, buns, etc also gained $2,500,000 in (hopefully profitable) sales -- I think this is called the "domino effect"? On the other hand if I were to spend $1M to buy stock in the burger restaurant company there would be nowhere near as much profit or potential utility in that single transaction and almost no domino effect. Right? $\endgroup$ – O.M.Y. May 14 '17 at 13:24
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    $\begingroup$ Unfortunately, I don't think this answers the question, which I think it is "do the number and/or size of transaction benefit the economy?" If only the number, then less inequality "benefits" the economy from the point of view of transactions. $\endgroup$ – luchonacho Aug 12 '17 at 8:49

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