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As far as I know, money velocity is an average amount of times a typical, say, dollar, gets spent on goods during 1 year. So if it's spend N times to pay for goods, then money velocity equals N.

But I wonder if it's all the truth or only part/simplification of it. Suppose an average dollar is spent, on average, 1 time to pay for goods, 2 time to pay taxes, 4 times to pay subsidies, 8 times to pay pensions. What money velocity would be?

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Velocity of money is according to the Fed definition:

The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time.

Hence paying taxes/transfers is not counted. In your example the velocity would be 1 assuming government does not spend the money from those taxes on goods and services, and assuming the money transferred through subsidies or pensions are not spent at all.

Also, as a side note velocity is rarely calculated directly due to the practical difficulties. Rather its often just inferred from other variables. Furthermore, the example you give cannot occur in practice as 1 dollar cannot be simultaneously just spent once, taxed twice and transferred 12 times at the same time but I take it that the numbers are just randomly selected.

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  • $\begingroup$ "domestically- produced good" But how about goods that were just assembled domestically? Do they count as domestically produced? $\endgroup$ – user161005 Jul 21 at 4:31
  • $\begingroup$ @user161005 it’s domestic in the same sense as the GDP is. $\endgroup$ – 1muflon1 Jul 21 at 11:06

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