THERMOECONOMICS - Vocat International Ltd

2
Copyright: John Bryant, VOCAT International Ltd 2012, for personal use only.
format to the ideal gas equation. Pikler (1954) has highlighted the
connections between the velocity of circulation and temperature.
Thus, in equation (5.1), there are four variables to consider, and in
differential form equation (5.1), from now on without the subscripts, can be
written as:
dP dV dN dT
+ = +
(5.3)
P V N T
The fifth factor, the nominal currency value k, is fixed by definition, though
it can change its effective value through inflation and international
comparison.
At this stage we are not pre-forming a view on how the factors inter-relate,
and whether they follow a Monetarist, Keynesian or other school of
thought. All that can be confirmed is a tautological identity, with a change
in one or more of the factors automatically equating to a balancing change
in the others, in a manner so far undefined. All of the factors can vary, and
none can be considered to be constant. A particular point to note with the
model so far outlined, however, is that the velocity of circulation T,
calculated as output in value terms divided by money supply, carries a
connotation of value too, since the nominal value k is deemed to be
unchanging, and the number N of monetary instruments is just that – a
number. If the number of monetary instruments N in circulation remains
constant, when output price P and output volume V are each changing in
some fashion, then the changes in P and V are reflected in a change in the
velocity of circulation T. T can therefore carry value as well as volume.
This is not to say of course that the number of money instruments N
necessarily remains the same.
Figure 5.2 illustrates the trends of economic development of the UK and
USA economies. UK data is taken from quarterly statistics of Economic
Trends Annual Supplement (www.statistics.gov.uk). USA data is taken
from quarterly statistics of www.federalreserve.gov and www.bea.gov.
Volume data is taken from GDP chain volume measures [UK 2008 prices,
USA 2005 prices]. The Price deflator is calculated by dividing GDP at
market prices by the volume measure. The raw data was smoothed by
calculating 4-quarter moving averages. The date range was decided by what
data was easily available. UK figures are based on an M4 definition of
money, whereas US figures are now based on M2 (publication of M3
figures ceased in 2006).