Transactions Approach and Cash Balance Approach

In this article we will discuss about the similarities and dissimilarities between transactions approach and cash balance approach of money.

Similarities between Transactions Approach and Cash Balance Approach:

The two approaches have the following similarities:

1. Same Conclusion:

The Fisherian and Cambridge versions lead to the same conclusion that there is a direct and proportional relationship between the quantity of money and the price level and an inverse proportionate relationship between the quantity of money and the value of money.

2. Similar Equations:

The two approaches use almost similar equations. Fisher’s equation r P= MV/T is similar to Robertson’s equation ” P = M/kT However, the only difference is between the two symbols V and k which are reciprocal to each other. Whereas |1/k| k = |1/V| Here V refers to the rate of spending and k the amount of money which people wish to hold in the form of cash balances or do not want to spend. As these two symbols are reciprocal to each other, the differences in the two equations can be reconciled by substituting 1/V for k in Robertson’s equation and 1/k for V in Fisher’s equation.

3. Money as the Same Phenomenon:

The different symbols given to the total quantity of money in the two approaches refer to the same phenomenon. As such MV+M’V of Fisher’s equation, M of the equations of Pigou and Robertson, and n of Keynes’ equation refer to the total quantity of money.

Dissimilarities between Transactions Approach and Cash Balance Approach:

Despite these similarities the two approaches have many dissimilarities:

1. Functions of Money:

The two versions emphasize on different functions of money. The Fisherian approach lays emphasis on the medium of exchange function while the Cambridge approach emphasises the store of value of function of money.

2. Flow and Stock:

In Fisher’s approach money is a flow concept while in the Cambridge approach it is a stock concept. The former relates to a period of time and the latter to a point of time.

3. V and k Different:

The meaning given to the two symbols V and k in the two versions is different. In Fisher’s equation V refers to the rate of spending and in Robertson’s equation k refers to the cash balances which people wish to hold. The former emphasises the transactions velocity of circulation and the latter the income velocity.

4. Nature of Price Level:

In Fisher’s equation, P refers to the average price level of all goods and services. But in the Cambridge equation P refers to the prices of final or consumer goods.

5. Nature of T:

In Fisher’s version, T refers to the total amount of goods and services exchanged for money, whereas in the Cambridge version, it refers to the final or consumer goods exchanged for money.

6. Emphasis on Supply and Demand for Money:

Fisher’s approach emphasises the supply of money, whereas the Cambridge approach emphasises both the demand for money and the supply of money.

7. Different in Nature:

The two approaches are different in nature. The Fisherian version is mechanistic because it does not explain how changes in V bring about changes in P. On the other hand, the Cambridge version is realistic because it studies the psychological factors which influence k. It is on account of these differences that Hansen wrote: “It is not true as is often alleged that the cash balance equation is merely the quantity theory in new algebraic dress.”