Posts tagged “velocity of money”


Spending, income and the circular flow of money
The simplest economic model conceivable

This is the first in what I hope to be a series of posts on modelling the economy. My intention is to explore economic modelling using a bit of theory, a bit of code, and some attempt to understand the results intuitively. I'll use the Python programming language to do this and describe and share all of the code. I was motivated to do this by reading Monetary Economics by Wynne Godley and Marc Lavoie, which describes increasingly complex models of the monetary economy in great detail. I am actually only about halfway through the book and decided to consolidate what I had learned so far. This post, and probably the next few, actually steps back from the starting point of Godley & Lavoie and describes a much simpler model in an attempt to isolate and identify some of the fundamental components and processes which contribute to the behaviour of the economy. This post shows that:

  • Income and money are separate concepts. Money is a stock, income is a flow (measured per unit of time)
  • Income is identically equal to spending, since these flows form two sides of every transaction
  • Total income over some time period is generated by a given stock of money circulating at a certain rate (termed the "velocity of money")
  • In an economy with a fixed money supply and wherein all income is spent, total income is constant over time
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