Question

Compare the approaches of Fisher’s transactions and Pigou’s cash balances to the
quantity theory. Are there any similarities between them? If so, in which respects? Or
should they be treated as different approaches altogether?

Answer 1

Similarities: Certainly there are some similarities between two theories.

• Both Fisherian Transactions and Pigou’s Cash Balances theory agree that there is a clear and proportionate correlation between the money quantity and the level of price, and a reverse proportional correlation between the money quantity and the value of money.
• Both use similar type of equation. Fisherian Equation: P = MV/T. Pigou’s Equation: P = M/kT. Here V and k are mutually reciprocal. So V = 1/k.

Differences: While the two methods are close, they have several differences:

• In terms of nature, both approaches differ. The Fisherian theory is mechanical because the modifications in V do not explain how changes in P occur. On the other hand, the version of Cambridge is realistic because it examines the psychological factors that affect k.
• Both models highlight different money functions. The Fisherian analysis concentrates on the mode of exchange, while the Pigou’s theory explains money value determination according to the overall value of money.
• Money is a flow principle in Fisher's theory, while it is an inventory concept in Pigou’s Cash Balances theory.

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