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Bob gets paid every month and lives paycheck-to-paycheck, so for Bob's money velocity is 12 (assuming that there is nobody else in the economy).

Al gets paid every two weeks and lives paycheck-to-paycheck too. So for Al's money velocity is 26(this time assuming that the whole economy has only Al).

If our economy will be made only out of Al and Bob, then velocity of money will be (12+26)/2=19 So far - so good.

But now Dell enters the scene. Dell gets paid every month, but unlike Bob doesn't live paycheck-to-paycheck. Even more, Dell saves \$X in order to buy a house (Thus Dell spends Wage-\$X). So how can we calculate velocity of money when taking in account Dell?(So the whole economy consist of Al, Bob and Dell)

I suspect that we will probably need to know when Dell will spend at the least \$X of their savings.If it will happens after 10 years because there are finally enough money to buy a house, then Dell's individual velocity of money will be 120/10=12. 120 is number of paycheck spent. You could say that Dell completed spending all paychecks in one move. Thus in economy made of Al, Bob and Dell velocity of money will be equal to (12+26+12)/3=16.(6)

Am I correct about my calculations that involve Dell? And if yes, then how do we deal with situation when we don't know when people are going to spend their savings? Do we just ignore such people when calculating money velocity for the whole economy?

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Simply put, the velocity of money is the rate at which consumers and businesses in an economy collectively spend money. The equation divides GDP by money supply (M1+M2), and theferore there are only two variables: GDP and money supply - there's no number of transactions made or wharever - the meaning is more about production rather than how many times someone paid something.

In your example, Dell's paycheck already exist as M1 cash - so there's no impact in the calculations. And unless he keeps it's money literally under the mattres, your assumption is wrong about savings. When you save money trough a savings account, for example, this money is beign used to finance others and therefore keeps running in the economy. It's not stationary

Check this website for more information: https://www.investopedia.com/terms/v/velocity.asp

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  • $\begingroup$ "and not how many times Dell, Bob or Al have spend it." Then what does velocity of money mean? $\endgroup$ – user161005 Mar 9 at 17:23
  • $\begingroup$ There can be different ways to calculate velocity of money, but it doesn't imply that the formula equals to the meaning of velocity of money. $\endgroup$ – user161005 Mar 9 at 17:28
  • $\begingroup$ " It's not stationary" Okay, forget about economy at the whole. How do we calculate velocity of money for Dell only? $\endgroup$ – user161005 Mar 9 at 17:31
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    $\begingroup$ You shouldn't add new questions into the comments. However I edited my answer to answer better your questions. $\endgroup$ – Croves Mar 9 at 17:55

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