Velocity of Money

In economics, there is a concept called the velocity of money. It's the rate at which currency is exchanged between participants in the economy.

As an example, let's say there is an accountant, a grocer, and a farmer all of whom have $100 between them. It's time for the accountant to buy some groceries, so he gives the grocer the $100. Now the grocer needs to buy more stock for his store so he gives the farmer the $100. Let's also say it's April so the farmer needs to do his taxes. The farmer goes to the accountant and gives the $100 to him.

That original $100 created $300 of economic value. Now, this is a very simplified example. Money, generally, isn't exchanged in a circular fashion such as this; however, this helps explain the idea.

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