Work It Out Chapter 18(33)

Work It Out

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Monetarists believed for a period of time that the velocity of money was stable within a country. However, with financial innovation, the velocity began shifting around erratically after 1980. As would be expected, the velocity of money is different across countries depending upon the sophistication of their financial systems velocity of money tends to be higher in countries with developed financial systems. The accompanying table provides money supply and GDP information in 2013 for six countries.

Country	National Currency	M1 (billions in national currency)	Nominal GDP (billions in national currency)
Egypt	Egyptian pounds	431	1,753
South Korea	Korean won	515,643	1,428,294
Thailand	Thai bhat	1,608	11,898
United States	U.S. dollars	2,832	16,800
Kenya	Kenyan pounds	967	3,797
India	Indian rupees	19,118	113,550

Table

Calculate the velocity of money for each of the countries. Round your answers to the nearest tenth.

Country	M1 (billions in national currency)	Nominal GDP (billions in national currency)
Egypt	431	1,753
South Korea	515,643	1,428,294
Thailand	1,608	11,898
United States	2,832	16,800
Kenya	967	3,797
India	19,118	113,550

Table

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The velocity of money is defined as nominal GDP divided by the quantity of money. For example, the velocity of money in Egypt is 1,753/431 = 4.1. The velocity of money for each of the countries is shown in the accompanying table. For further review see the section, “Monetarism.”

Calculate the velocity of money for each of the countries. Round your answers to the nearest tenth.

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Country	Nominal GDP per capita (U.S. dollars)
Egypt	3,225
South Korea	24,328
Thailand	5,674
United States	53,101
Kenya	1,016
India	1,504

Table

In the table below rank the countries in descending order (1 being the highest and 6 being the lowest) of velocity of money and per capita income.

Country	Velocity of Money	Per Capita Income
Egypt
South Korea
Thailand
United States
Kenya
India

Table

Would you expect wealthy countries to have more sophisticated financial systems?

yes

Rank in descending order of velocity: Thailand, India, United States, Egypt, Kenya, South Korea. Rank in descending order of per capita income: United States, South Korea, Thailand, Egypt, India, Kenya. According to the above rankings, wealthy countries, with the exception of South Korea, tend to have a higher velocity of money than do poor countries, but the relationship is not exact. Prior to the financial crisis, South Korea had a much higher velocity of money. Since the crisis, South Korea saw their money supply increase from 77,274 billion won to 515,643 billion won. Prior to the financial crisis in 2007, South Korea had a velocity of money greater than 10. One would expect wealthy countries to have more sophisticated financial systems.For further review see the section, “Monetarism.”

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Work It OutChapter 18(33)

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