Economic theory relating changes in the price level to changes in the quantity of money.
It has often been used to analyze the factors underlying inflation and deflation . The quantity theory was developed in the 17th and 18th centuries by philosophers such as David Hume and was intended as a weapon against {{link=mercantilism">mercantilism . Drawing a distinction between money and wealth, advocates of the quantity theory argued that if the accumulation of money by a nation merely raised prices, the mercantilist emphasis on a favourable balance of trade would only increase the supply of money without increasing wealth. The theory contributed to the ascendancy of free trade over protectionism . In the 19th–20th centuries it played a part in the analysis of business cycle s and in the theory of rates of foreign exchange .