The velocity of money is represented by the average frequency of use of a monetary unit for the acquisition of new goods and services in a specific period of time. In many respects, this indicator depends on economic activity with the current money supply. When determining a specific time period, the velocity of money is represented by a number.
It is easy enough to imagine the calculus of a specified indicator using a specific example. For example, imagine a private economy with a money supply of 500 rubles and with the presence of two business entities: a farmer and a mechanic, who carry out several transactions each year. So, a farmer pays mechanics 500 rubles to repair a tractor. The mechanic buys grain for 400 rubles, and also pays the farmer 100 rubles for the inspection and feeding of his pets. Thus, the total value of all transactions is 1000 rubles, and each ruble was used twice a year. That is why the velocity of money is two per year.
Money turnover is represented by the manifestation of the essence of money in their movement. It also covers the process of exchange and distribution. The volume and structure of turnover are influenced by production and consumption.
So, a long production process, which requires an increase in inventories, significantly increases the money turnover associated with such an acquisition. And the production of products having high labor intensity increases the money turnover precisely in wages and, as a result, increases the cash incomes of the population, which are subsequently used for consumption.
One of the components of the indicator in question is the payment turnover, in which money can be used as a means of payment to pay off arising obligations. This turnover can be carried out both in cash and non-cash.
To summarize the above, we conclude that money should be in constant motion between such main subjects of the economy: state bodies, legal entities and individuals. It is their movement in various forms (cash and non-cash) that forms the velocity of money.
State bodies are understood as controlling, fiscal bodies, and the National Bank. As legal entities, commercial banks can participate in monetary circulation.
The issued mass of money in circulation forms an issue, which can be primary, carried out by the central bank, and secondary (issue of deposit money of commercial banks).
Another way to replenish the money supply in circulation is the budget debt tracking system, which is based only on the placement of government debt on the securities market.
By selling such securities, the state makes a loan of funds from the subjects of the financial system and draws them up as a state debt of the country. By acquiring government obligations, the Central Bank directly increases the circulation of the money supply and forms the basis for the subsequent issue of deposit offers of commercial banks.
As indicated, commercial banks can also be emitters of the money supply, which form deposits by providing loans to individuals or business entities. When a loan is granted, the money supply grows; when a loan is returned, it decreases. The occurrence of such an effect of money emission can be successful when a commercial bank purchases government securities on the stock market (only in this case government obligations can turn into cash). But the additional issue may occur when the bank acquires foreign currency.