Why does the monetarist equation exclude all intermediary transactions and transactions on capital goods ?
The standard equation is M*V=P*T
with T all transactions. Then in a swift move this is turned into
M*V=P*Q
With Q the real annual production.
This erases all intermediary transactions (for instance when the corn is sold by the farmer to a farming gross seller, then sold to a transporter, then to a gross retailer, then to the small one, then to the consumer). All those transactions require money.
This erases all transactions on capital goods : Buying bonds, shares and houses require money. yet those transaction are not included in the equation.
This is very problematic since their has been a boom in transactions on capital goods and in capital goods prices in the recent years, thus boosting money demand.
Yet all this is unsee by the standard equation and this explains the failure of the predictive power of the equation and of monetarism. The money growth has been large and contrary to monetarist belief consumption goods inflation has been small. So, any explanation ?
Answer:
It is the same principal as a VAT.
If a finished car is $30,000 to aggregate to Q; perhaps $5,000 is incurred by the steel company, $15,000 incurred by Delphi, $8000 incurred in labor by GM, and the other $2000 by the dealership.
Q will equal T because of pyramiding effects of cost on the finished good.
isn't it just the same? If T=all transactions and Q=annual production then it looks the same to me.
T; computed over 12 months is = Q. Just an analysis.
Even in the equation M x V= P x T or M x V = P x Q, it appears to be the same. Maybe your question can be well answered if what comprises T and Q can be expounded.
sorry if i did not make sense
it does include them. Q has all the intermediate goods inside it. A car is a Q but in a car is steel, tires, factory useage, and everything else used to make it. The P of the car includes the price of all those goods. The price of all final goods includes the costs of making the final good and that includes the price of all intermediate goods and inputs.
When using transaction you are counting net transactions or value added. This reduces the transaction so you don't double count the good
Inflation is small because a shitload of chinese crap washes up at Walmart every minute. There wouldnt even be a dollar as we speak not for China increasing the supply side of the equation. The fed does a wonderful job increasing the demand side.
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with T all transactions. Then in a swift move this is turned into
M*V=P*Q
With Q the real annual production.
This erases all intermediary transactions (for instance when the corn is sold by the farmer to a farming gross seller, then sold to a transporter, then to a gross retailer, then to the small one, then to the consumer). All those transactions require money.
This erases all transactions on capital goods : Buying bonds, shares and houses require money. yet those transaction are not included in the equation.
This is very problematic since their has been a boom in transactions on capital goods and in capital goods prices in the recent years, thus boosting money demand.
Yet all this is unsee by the standard equation and this explains the failure of the predictive power of the equation and of monetarism. The money growth has been large and contrary to monetarist belief consumption goods inflation has been small. So, any explanation ?
Answer:
It is the same principal as a VAT.
If a finished car is $30,000 to aggregate to Q; perhaps $5,000 is incurred by the steel company, $15,000 incurred by Delphi, $8000 incurred in labor by GM, and the other $2000 by the dealership.
Q will equal T because of pyramiding effects of cost on the finished good.
isn't it just the same? If T=all transactions and Q=annual production then it looks the same to me.
T; computed over 12 months is = Q. Just an analysis.
Even in the equation M x V= P x T or M x V = P x Q, it appears to be the same. Maybe your question can be well answered if what comprises T and Q can be expounded.
sorry if i did not make sense
it does include them. Q has all the intermediate goods inside it. A car is a Q but in a car is steel, tires, factory useage, and everything else used to make it. The P of the car includes the price of all those goods. The price of all final goods includes the costs of making the final good and that includes the price of all intermediate goods and inputs.
When using transaction you are counting net transactions or value added. This reduces the transaction so you don't double count the good
Inflation is small because a shitload of chinese crap washes up at Walmart every minute. There wouldnt even be a dollar as we speak not for China increasing the supply side of the equation. The fed does a wonderful job increasing the demand side.
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