Site Loader
111 Rock Street, San Francisco

The mass of money serving money turnover, its composition and factors determining its change

Money supply – a set of consumer, payment and accumulated funds serving economic relations and belonging to individuals and legal entities, as well as the state.

The money supply is an important quantitative indicator of money and consists of two main components – active moneyused in cash and non-cash circulation and passive (savings and savings, reserves, account balances).

The money supply is influenced by two factors:

  1. the amount of money in circulation;
  2. the speed of money circulation.

The volume of the money supply is determined by the state – the issuer of money, its legislative power. The growth in emissions is due to the needs of commodity circulation and the state.

In Ukraine, the main reasons for the growth of the money supply are: excessive state budget deficit and a significant reduction in the rate of production and commodity turnover.

The indicator of the mass of money in circulation (M) has several meanings (monetary aggregates). NBU defines the following units:

  1. M0 = cash in circulation;
  2. Mone = M0 + balances of cash deposits in bank accounts on demand;
  3. M2 = Mone + balances of cash deposits in bank urgent accounts;
  4. M3 = M2 + customer funds on trust operations of banks.

In addition, the NBU determines an indicator called the monetary base. It includes the unit M0, cash at the cash desks of banks and reserves of commercial banks on their accounts with the NBU. This money does not participate in the credit banking turnover and does not additionally increase the mass of money in circulation, but only serves as the basis for its growth.

Each unit has a specific purpose in the practice of money management, and all together they give a holistic picture of the structure and dynamics of money supply and money circulation.

Velocity of circulation of money and its influence on the mass and stability of money

Velocity of money circulation – represents an intensive movement of money when they perform the functions of circulation and payment.

To calculate this indicator, the following methods are used:

  1. The speed of movement of money in the circulation of the value of a social product or the circulation of income is defined as the ratio of GNP or ND to the money supply (aggregates Mone or M2). This indicator indicates the relationship between money circulation and the processes of economic development.
  2. The turnover of money in the payment turnover is determined by the ratio of the amount of money in bank accounts to the average annual value of the money supply in circulation. This indicator indicates the speed of cashless payments.

In addition, general economic factors are used, i.e. cyclical development of production, its growth rates, price movements, as well as monetary (monetary) factors, i.e. the structure of payment turnover (the ratio of cash and non-cash money), the development of credit operations and mutual settlements, the level of interest rates on loans in the money market, as well as the introduction of electronic systems for transactions in credit institutions and the use of electronic money in settlements.

In addition, the frequency and uniformity of income payments, the level of savings and savings have a significant impact on the speed of money circulation.

The velocity of money circulation is inversely proportional to the amount of money in circulation, therefore, the acceleration of their turnover means an increase in the money supply. An increased money supply with a constant volume of goods and services on the market leads to a depreciation of money, that is, ultimately it is one of the factors of the inflationary process.

The law of the amount of money required for circulation, its essence, requirements and consequences of violation of requirements

To ensure the stability of money, it is necessary to maintain proportionality between the mass of commodities and the volume of monetary services to the population, on the one hand, and the money supply in circulation, on the other. The development of credit relations and banking helped to reduce the need for cash banknotes. The amount of money required for circulation is determined by the formula:

The amount of money required for circulation

where CD – the amount of money in circulation;
CT – the sum of the prices of the goods sold;
TO – the sum of the prices of goods sold on credit;
NS – payments for which the due date has come;
BP – mutual settlements;
O – the number of revolutions of the monetary unit of the same name;
DR – money reserve for the sphere of circulation.

The excess of the number of monetary units in circulation over the sum of commodity prices (and as a result – the emergence of monetary units that do not have commodity coverage) leads to inflation.

The problem of monetizing gross domestic product

Acting as a means of circulation and payment, money is continuously moving from one economic entity to another, thereby serving the purchase and sale of goods and services, that is, the implementation of GDP.

The process of movement of money serving the implementation of GDP is called money circulation.

There is an internal connection between the process of GDP realization and money circulation: the larger the nominal volume of GDP realization, the greater the money flow will be, and vice versa.

Nominal GDP is determined by two factors: the physical volume of goods and services sold (Q) and the level of their prices (P). And the amount of money is determined by the mass of money in circulation (M), and the velocity of circulation of the monetary unit (V).

The mentioned quantities are taken into account in the exchange equation:

Exchange equation

On its basis, it is possible to determine the patterns of change in the main market processes and indicators, in particular: the level of commodity prices, the velocity of money circulation, the mass of money in circulation.

The level of commodity prices is determined by the equation:

Commodity price level

Money velocity:

Velocity of money circulation

The mass of money in circulation is characterized by the equation:

Mass of money in circulation

This equation is often called the law of money circulation.

The issue of filling the economy with money is extremely important for Ukraine. It is believed that the low (in comparison with other countries) degree of monetization is perhaps the main reason for the growth of debt and other numerous problems.

The degree (level) of monetization of the economy is calculated as the quotient of dividing the money in circulation by the volume of GDP. Both indicators are used in physical terms.

The growth of the money supply has its source in the growth of GDP. The rise in monetization means that a larger and larger share of GDP is kept in cash and vice versa.

Thus, an increase in the degree of monetization indicates an increase in the mobility of the economy, an increase in the potential flexibility of the behavior of economic agents.

Post Author: Rachel Reinbauer

Leave a Reply

Your email address will not be published.