Quantity theory of money and fundamental equation of traffic
I have argued that economics is a subset of transport economics, since transport economics includes time and space, and deals with the movement of many goods, while economics tends to be aspatial (and to a lesser extent atemporal) and focus on one good, money. The objective of this post is to suggest the equivalent of two fundamental relationships in two similar but largely unconnected fields, traffic engineering and macro-economics. These are the equation of exchange and the fundamental relationship of traffic.
The fundamental relationship of traffic says: Q=KV.
Q =flow (veh/hr) = Motorcars/Time (motorcars/time)
K= density (veh/km) = Motorcars/Distance
Vt = transportation velocity (km/hr) = Distance/Time
or in other words, dimensionally:
(M/D)(D/T) = M/T
The equation of exchange says: MVe=PY
where (quoting and rephrasing wikipedia):
M = the total amount of money in circulation on average in an economy during the period, say a year
Ve = economic velocity, or the velocity of money in final expenditures. (number of times a unit of money is spent in a given time period, e.g. a year). This differs from Vt.
P = the price level associated with transactions for the economy during the period
Y = total output per unit time.
We achieve equivalence if MV=PY can be mapped to KV = Q
First, let us assume that PY is the output, or GDP, this can be mapped directly to Q or motorcars per time
MVe=PY -> KVt = Q
where PY -> Q
So does MVe map to KVt ?
money supply * number of times money turns over per year =?= (number of motorcars / distance) * (distance / time)
So assuming money supply is a stock like the number of motorcars, and economic velocity Ve is in units of time-1, then it maps.
This equation is important in economics to understand inflation. If the money supply increases without any change in real output Y, than the price level must increase (if economic velocity Veis fixed), or the price level can remain constant if the velocity slows down (as in a recession when people spend less).
The equivalent in transportation suggests that if the number of cars in a system increases, and output flow remains constant, then a queue forms and velocity slows.