Friday, August 05, 2011

The Velocity of Money

GDP is a function of velocity of money. The simple concept which was so easy for me to understand theoretically did not strike me more until a few days back when I was crossing the road while coming to office. I saw a woman presumably from a village (a lower GDP area) who was also trying to cross the road. Pedestrians who are part of the city life (Higher GDP area), could easily find a way through the fast moving vehicles:  they ran, they sneaked through, they maneuvered .The high speed/velocity of their lives has made them accustomed to the high speed/velocity of their external environment. However it was a difficult situation for the village woman, who possibly leads a laid back slow life.
So what is the conclusion. I would sound far fetched as I always do:
The faster your life gets, you run faster, and you circulate your money faster, which in turns implies a higher velocity of money. That should reflect a higher GDP. This is my way of interpreting why the country side would have lower GDP while the city would have higher. This of course would be a vicious cycle, where you would need a fast sports car to travel even faster, however you can only get that when you have a higher gross product.
A few more abstract analogies:
a)  India never had, in fact never believed of fast expressways. However since the beginning of the new millennium, once the economy started having high growth, the highways started coming. Although they are not of the standards of the Auto Bahns, you can expect them to be, as GDP grows.
b) Indians still don't live on fast foods and still wold prefer the ghar ka khana over the canned foods. Implication: We are still not anywhere near US. (Pun Intended)
c) If you remember my blog post on teleportation. Can someone tell me what would happen to GDP under this concept if teleportation is indeed achieved.

For all those who are studying macroeconomics I, forget this crap blog and get back to whatever your Gregor Mankiw says on GDP and velocity of money.

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