<p>Velocity of money is according to the <a href="https://fred.stlouisfed.org/series/M2V" rel="nofollow noreferrer">Fed definition</a>:</p>
<blockquote>
<p>The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time.</p>
</blockquote>
<p>Hence paying taxes/transfers is not counted. In your example the velocity would be 1 assuming government does not spend the money from those taxes on goods and services, and assuming the money transferred through subsidies or pensions are not spent at all.</p>
<p>Also, as a side note velocity is rarely calculated directly due to the practical difficulties. Rather its often just inferred from other variables.  Furthermore, the example you give cannot occur in practice as 1 dollar cannot be simultaneously just spent once, taxed twice and transferred 12 times at the same time but I take it that the numbers are just randomly selected.</p>

CC BY-SA 4.0
2020-07-21T04:31:49.483Z
"domestically- produced good" But how about goods that were just assembled domestically? Do they count as domestically produced?
KarmaPeasant
CC BY-SA 4.0
2020-07-21T11:06:10.630Z
@user161005 it’s domestic in the same sense as the GDP is.
1muflon1
CC BY-SA 4.0
2020-07-20T18:24:10.357Z
2020-07-20T18:44:17.073Z
2020-07-20T18:44:17.073Z
1muflon1
<p>As far as I know, money velocity is an average amount of times a typical, say, dollar, gets spent on goods during 1 year. So if it's spend N times to pay for goods, then money velocity equals N.</p>
<p>But I wonder if it's all the truth or only part/simplification of it. Suppose an average dollar is spent, on average, 1 time to pay for goods, 2 time to pay taxes, 4 times to pay subsidies, 8 times to pay pensions. What money velocity would be?</p>

<macroeconomics><quantity-theory-of-money>
Are taxes,subsidies and social money transfers(i.e. welfare) accounted in money velocity?
KarmaPeasant
# Are taxes,subsidies and social money transfers(i.e. welfare) accounted in money velocity?

(Asked by: username_0 on 2020-07-20)

As far as I know, money velocity is an average amount of times a typical, say, dollar, gets spent on goods during 1 year. So if it's spend N times to pay for goods, then money velocity equals N.

But I wonder if it's all the truth or only part/simplification of it. Suppose an average dollar is spent, on average, 1 time to pay for goods, 2 time to pay taxes, 4 times to pay subsidies, 8 times to pay pensions. What money velocity would be?

**Tags:** macroeconomics, quantity-theory-of-money


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## 1 answers

### Answer by username_1 on 2020-07-20. Score: 2 | Accepted answer

Velocity of money is according to the [Fed definition](https://fred.stlouisfed.org/series/M2V):

> The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time.

Hence paying taxes/transfers is not counted. In your example the velocity would be 1 assuming government does not spend the money from those taxes on goods and services, and assuming the money transferred through subsidies or pensions are not spent at all.

Also, as a side note velocity is rarely calculated directly due to the practical difficulties. Rather its often just inferred from other variables. Furthermore, the example you give cannot occur in practice as 1 dollar cannot be simultaneously just spent once, taxed twice and transferred 12 times at the same time but I take it that the numbers are just randomly selected.

> **Comments:**
> **username_0**: "domestically- produced good" But how about goods that were just assembled domestically? Do they count as domestically produced?  
> **username_1**: @user161005 it’s domestic in the same sense as the GDP is.  

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