The marginal efficiency of capital (MEC) is that rate of discount which would equate the price of a

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capital Capital and its variations may refer to: Common uses * Capital city, a municipality of primary status ** Capital region, a metropolitan region containing the capital ** List of national capitals * Capital letter, an upper-case letter Econom ...

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with its present discounted value of expected income. The term “marginal efficiency of capital” was introduced by

John Maynard Keynes John Maynard Keynes, 1st Baron Keynes ( ; 5 June 1883 – 21 April 1946), was an English economist and philosopher whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originall ...

in his '' General Theory'', and defined as “the rate of discount which would make the

present value In economics and finance, present value (PV), also known as present discounted value (PDV), is the value of an expected income stream determined as of the date of valuation. The present value is usually less than the future value because money ha ...

of the series of

annuities In investment, an annuity is a series of payments made at equal intervals based on a contract with a lump sum of money. Insurance companies are common annuity providers and are used by clients for things like retirement or death benefits. Examples ...

given by the returns expected from the

capital asset A capital asset is defined as property of any kind held by an assessee. It need not be connected to the assesse’s business or profession. The term encompasses all kinds of property, movable or immovable, tangible or intangible, fixed or circula ...

during its life just equal its supply price”.Keynes, John Maynard; ''The General Theory of Employment, Interest, and Money'' (1936), p 135. The MEC is the net rate of return that is expected from the purchase of additional capital. It is calculated as the profit that a firm is expected to earn considering the cost of inputs and the

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of capital. It is influenced by expectations about future input costs and demand. The MEC and capital outlays are the elements that a firm takes into account when deciding about an investment project. The MEC needs to be higher than the

rate of interest In finance and economics, interest is payment from a debtor or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct ...

, ''r'', for investment to take place. This is because the present value PV of future returns to capital needs to be higher than the cost of capital, C_k. These variables can be expressed as follows: *

PV =\sum_^n \frac,

where ''n'' is the number of years during which the capital will be productive, and ''R''_''i'' is the net return in year ''i''; *

C_k =\sum_^n\frac,

where ''C''_''k'' is the upfront capital outlays; this equation defines the MEC. Hence, for investment to take place, it is necessary that PV > C_k; that is, MEC > r. As a consequence, an inverse relationship between the rate of interest and investment is found (i.e.: a higher rate of interest generates less investment). With the

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according to its data bank "AMECO" (Annual Macro-Economic Data) the marginal efficiency of capital is defined as "Change in

GDP Gross domestic product (GDP) is a monetary measure of the total market value of all the final goods and services produced and rendered in a specific time period by a country or countries. GDP is often used to measure the economic performance o ...

at constant market prices of year T per unit of

gross fixed capital formation Gross fixed capital formation (GFCF) is a component of the expenditure on gross domestic product (GDP) that indicates how much of the new value added in an economy is invested rather than consumed. It measures the value of acquisitions of new or ...

at constant prices of year T − 0.5

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"Marginal Efficiency of Capital" in Ameco
/ref> MEoC

References

Economic efficiency Keynesian economics Marginal concepts {{Econ-theory-stub

See also

References