Velocity of money: how many times one dollar changes hand in an economy

Wikipedia defines “velocity of money” as “the number of times that one unit of currency is used to purchase goods and services within a given time period. In other words, it's how many times money is changing hands.” and gave a concrete example.

So if you spend one dollar on a pizza, the pizza maker spends it on buying tomatoes, the tomato farmer then spends it on petrol, the one dollar has been transacted three times.

Let us compute this measure by dividing the Gross Domestic Product (GDP) of an area by its liquid money supply (M1).

We will see this measure was around 5 for the United States, trending down from 5 to 1-2 for UK and Euro Area (through 2023), and fluctuating around 1-2 for China (through 2022).

United States

The US M1 measure was changed beginning May 2020 to include money market funds and appeared to have jumped (https://fred.stlouisfed.org/series/M1SL Notes). If we exclude the money market funds from the current M1 statistic the velocity of money would be around 5. If we include the money market funds the current velocity of money is around 1-2.

United Kingdom

data through 2023

Euro Area (19 Countries)

data through 2023

China

data through 2022

Japan

data through 2023

As conclusion, we generally observe tempering of the rate of money changing hands in economies and an increase of short-term saving across the globe.