Money Theory Value

Money theory value is a broad concept. The development of money theory value owes much to the classical economists. The idea of the Quantity Theory of Money started to gain prominence during the early phase of 16th century. Economists like Alfred de Fovile, Ludwig von Mises and Irving Fisher helped in the development of the theory of money value. In the post-Keynesian period, the ideas of Milton Friedman brought about a sea change in the money value theory.

Overview of Money Theory Value

Money theory value describes how the quantity or amount of money is related with the prevailing market price of the products and services. According to the Quantity Theory of Money, money quantity is directly related with the price level. As a result an increase in the volume of money results in equiproportionate rise in price level. From this theory it follows that inflation is direct consequence of the rise in amount of money.

There is another approach that describes the money value theory from a different point of view. This theory of money value states that a rise in the supply of money causes the marginal value to fall. It results in inflation.

Quantitative Approach of Money Theory Value

The mathematical representation of the Quantity Theory of Value (QTM) is described below:
Fisher's equation states that: MV = PT, where M implies money supply or the total money supply in an economy, V denotes velocity of money or the circulation velocity of money, P is the price level related with monetary transaction and T represents the aggregate value of the goods and services transacted in a particular period of time.
The Fisher's equation of the Quantity Theory of Money is based on the following assumptions:

Velocity of money or V and the total volume of trade or T are fixed in the short-run.
It is the money supply that acts as the main regulator economic activities taking place in an economy.
Fisher's theory assumes economic equilibrium with total employment.
The volume of trade is fixed by the available factors of production like capital, knowledge, labor and organization.