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Deriving the new quantity equation: an approach for a closed and an open economy

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  • Paul J. J. Welfens

    (European Institute for International Economic Relations at the University of Wuppertal (EIIW)
    University of Wuppertal
    AICGS/Johns Hopkins University)

Abstract

This theoretical contribution shows a simple way in which the quantity equation can be derived as a long-term equilibrium solution for the case of a closed economy and an open economy, respectively. It is shown first for the case of a closed economy which parameters stand behind “velocity” and that indeed there are arguments why velocity should be constant over time – assuming a specific parameter set of the goods market. It is noteworthy that the quantity equation can be derived both in a demand-side context and in a long run supply-side approach. Moreover, a new derivation is presented for the case of an open economy and it is shown that trade as well as foreign direct investment should be expected to have an influence on the price level and the inflation rate, respectively. Finally, the analysis suggests that financial market activities should have an impact on the price level. I gratefully acknowledge technical support by Murat Ismail and David Hanrahan. Moreover I appreciate discussions with Jens Perret (Schumpeter School of Business and Economics) and Thomas Gries, University of Paderborn. The usual disclaimer applies.

Suggested Citation

  • Paul J. J. Welfens, 2016. "Deriving the new quantity equation: an approach for a closed and an open economy," International Economics and Economic Policy, Springer, vol. 13(4), pages 549-561, October.
    • Handle: RePEc:kap:iecepo:v:13:y:2016:i:4:d:10.1007_s10368-014-0298-3
    DOI: 10.1007/s10368-014-0298-3
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    References listed on IDEAS

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    1. Milton Friedman, 1971. "A Theoretical Framework for Monetary Analysis," NBER Books, National Bureau of Economic Research, Inc, number frie71-1.
    2. Paul Welfens & Jens Perret, 2014. "Information & communication technology and true real GDP: economic analysis and findings for selected countries," International Economics and Economic Policy, Springer, vol. 11(1), pages 5-27, February.
    3. Paul J.J. Welfens, 2011. "Innovations in Macroeconomics," Springer Books, Springer, number 978-3-642-11909-5, April.
    4. Emily Blanchard & Xenia Matschke, 2015. "U.S. Multinationals and Preferential Market Access," The Review of Economics and Statistics, MIT Press, vol. 97(4), pages 839-854, October.
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    More about this item

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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