Quantity equation

The quantity equation was (further) developed by the U.S. economist Irving Fisher at the beginning of the 20th century.[1] Since it can be used to illustrate and analyze the effects of changes in various framework conditions, Friedman compared it in terms of its significance for monetary theory with Einstein`s formula E=m*c2 and its significance for physics. The equation is defined as follows:

G is the average nominal money supply in a period, U indicates the average number of times each monetary unit was used for payments in a specified period under consideration, P represents the average price of goods and services, and Y represents the real gross domestic product GDP (national income). The quantity equation is an identity equation, i.e. both sides of the equation correspond to each other (tautology). The left term is the quantity of money in circulation in real terms, the right term is the quantity of purchased goods and services multiplied by the price paid or by a price index.