fisher’s equation of exchange

8/2/2019 Fishers Equation of Exchange

1/17

Fishers Equation of Exchangethe total volume of money in a

country, is equal to the total value

of all goods and services. The total

Supply of money is obtained by=Quantity of money in circulation (M)

X Velocity in circulation (V)or M x V=Total supply of money


2/17

The velocity of circulation meansthe average no. of times a unit

money change hands amongspenders during a given period oftime.


3/17

Demand for money:

money in an economy is only for

transaction. The total goods andservices bought and sold during a

period is obtained by

= volume of goods and servicestransacted or total amount of output

(T) with the average price of thesegoods and services (P).Or total transaction of goods and

services= P x T


4/17

Because: total supply of

money=total demand of money

So:MV=PT

or P=MV/T

from the above relationship, it clearthat general level of prices varies

directly with the quantity of moneyand velocity of money. Andinversely with the volume of

transaction.


5/17

Further, greater the quantity of

transaction (T), to be purchasedwith a given flow of money (MV),lower will be price level general.

And vice-versa.


6/17

Assumptions of theory

1. the volume of circulating moneyM. There is no hording of money.

2.the price level of inactive. it doesnot change by itself.

3. the theory assume that T andV remain constant.


7/17

1. Unrealistic assumption:

fisher theory based on that V&

T are independent variables.And not affected by the

changes in the quantity of

money (M) In not proper.

2. Price level is active factor:the theory is assume that price

level is passive factor.


8/17

Process of price changed not

explained: it fails to explain how theprice level changes in the quantity

of money.


9/17

Time lags: there is always a time

lags between the change in moneysupply and its effect on price level.It is not slow and gradual process.

It is possible that other things maynot remain same by that time.


10/17

Cambridge approach

as per this theory, the demand formoney not only for transaction only,but also for the purpose of value of

store (precautionary motive).Fisher theory was based on flow

concept. But Cambridge approachconsiders money a stock concept.


11/17

Cash transaction approach, money

is expected to circulate. In cahshapproach, money velocity is

discarded. Here. Money is kept asidle balance to have command overfuture goods.


12/17

Marshall EquationM=KY

M= total quantity of money at a

point of time

K= proportion of income whichpeople want to hold in form of

money.

Y= Level of national income

PIGOU E i


13/17

PIGOU Equation:

P=KR/M

M= total quantity of money at atime

R= total real income

K= proportion of real income, whichthe community desire to hold.Pigou equation shows that the

value of money (P) changesinversely in response to change in

the supply of money (M).


14/17

Robertson Equation


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fisher’s equation of exchange

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