Abstract
The equation of exchange (often referred to as the quantity equation) is one of the oldest formal relationships in economics, early versions of both verbal and algebraic forms appearing at least in the 17th century. Perhaps the best known variant of the equation of exchange is that expressed by Irving Fisher (1922):
Equation (1) represents a simple accounting identity for a money economy. It relates the circular flow of money in a given economy over a specified period of time to the circular flow of goods. The left-hand side of equation (1) stands for money exchanged, the right-hand side represents the goods, services and securities exchanged for money during a specified period of time. M is defined as the total quantity of money in the economy, T as the total physical volume of transactions, where a transaction is defined as any exchange of goods, including physical capital, services and securities for money, P is an appropriate price index representing a weighted average of the prices of all transactions in the economy. Finally, to make the stock of money comparable with the flow of the value of transactions (PT), and to make the two sides of the equation balance, it is multiplied by V, the transactions velocity of circulation, defined as the average number of times a unit of currency turns over (or changes hands) in the course of effecting a given year’s transactions.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
Bibliography
Bordo, M.D. 1983. Some aspects of the monetary economics of Richard Cantillon. Journal of Monetary Economics 12, 234–58.
Briscoe, J. 1694. Discourse on the Late Funds.… London.
Cantillon, R. 1755. Essai sur la nature du commerce en général. Ed. H. Higgs, London: Macmillan, 1931; reprinted New York: Augustus M. Kelley, 1964.
Fisher, I. 1911. The Purchasing Power of Money. 2nd edn, 1922. Reprinted, New York: Augustus M. Kelley, 1963.
Foville, A. de. 1907. La monnaie. Paris.
Friedman, M. 1956. The quantity theory of money — a restatement. In Studies in the Quantity Theory of Money, ed. M. Friedman, Chicago: University of Chicago Press.
Friedman, M. and Schwartz, A.J. 1982. Monetary Trends in the United States and the United Kingdom: their relation to income, prices and interest rates, 1867–1975. Chicago: University of Chicago Press for the National Bureau of Economic Research.
Hadley, A.T. 1896. Economics. New York.
Hicks, J.R. 1935. A suggestion for simplifying the theory of money. Economica 2, February, 1–19.
Holtrop, M.W. 1929. Theories of the velocity of circulation of money in earlier economic literature. Economic Journal 39, January, 503–24.
Hume, D. 1752. Of money. In Essays, Moral, Political and Literary, Vol. I of Essays and Treatises, a new edition, Edinburgh: Bell and Bradfute; Cadell and Davies, 1804.
Humphrey, T.M. 1984. Algebraic quantity equations before Fisher and Pigou. Federal Reserve Bank of Richmond Economic Review 70(5), September/October, 13–22.
Kemmerer, E.W. 1907. Money and Credit Instruments in Their Relation to General Prices. New York: H. Holt & Co.
Keynes, J.M. 1923. A Tract on Monetary Reform. Reprinted, London: Macmillan for the Royal Economic Society, 1971; New York: St. Martin’s Press, 1971.
Keynes, J.M. 1936. The General Theory of Employment, Interest and Money. Reprinted, London: Macmillan for the Royal Economic Society, 1973; New York: St. Martin’s Press, 1971.
Lang, J. 1811. Gundlineien der politischen Arithmetik. Kharkov.
Levasseur, E. 1858. La question de l’or: les mines de Californie et d’Australie. Paris.
Lloyd, H. 1771. An Essay on the Theory of Money. London.
Locke, J. 1691. The Works of John Locke, Vol. 5. London, 1823.
Lubbock, J. 1840. On Currency. London.
Marget, A.W. 1942. The Theory of Prices. New York: Prentice-Hall.
Marshall, A. 1923. Money, Credit and Commerce. London: Macmillan. Reprinted, New York: Augustus M. Kelley, 1965.
Newcomb, S. 1885. Principles of Political Economy. New York: Harper & Brothers.
Norton, J.P. 1902. Statistical Studies in the New York Money Market. New York.
Pantaleoni, M. 1889. Pure Economics. Trans. T.B. Bruce, London: Macmillan, 1898.
Pigou, A.C. 1917. The value of money. Quarterly Journal of Economics 32, November.
Reprinted in Readings in Monetary Theory, ed. F.A. Lutz and L.W. Mints for the American Economic Assocation, Homewood, Ill.: Irwin, 1951.
Pigou, A.C. 1927. Industrial Fluctuations. 2nd edn, London: Macmillan, 1929; reprinted, New York: A.M. Kelley, 1967.
Rau. K.H. 1842. Grundsätze der Volkswirtschaftslehre. 4th edn, Leipzig and Heidelberg.
Schumpeter, J.A. 1954. History of Economic Analysis. New York: Oxford University Press.
Turner. S. 1819. A Letter Addressed to the Right Hon. Robert Peel with Reference to the Expediency of the Resumption of Cash Payments at the Period Fixed by Law. London.
Walras, L. 1874–7. Eléments d’économie politique pure. Lausanne: Corbaz. Definitive edn. 1926, Trans. by W. Jaffé as Elements of Pure Economics, New York: Orion, 1954.
Editor information
Copyright information
© 1989 Palgrave Macmillan, a division of Macmillan Publishers Limited
About this chapter
Cite this chapter
Bordo, M.D. (1989). Equation of Exchange. In: Eatwell, J., Milgate, M., Newman, P. (eds) Money. The New Palgrave. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-19804-7_17
Download citation
DOI: https://doi.org/10.1007/978-1-349-19804-7_17
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-0-333-49527-8
Online ISBN: 978-1-349-19804-7
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)