Marginal efficiency of capital

The term “marginal efficiency of capital” was introduced by John Maynard Keynes in his General Theory, and defined as “the rate of discount which would make the present value of the series of annuities given by the returns expected from the capital asset during its life just equal its supply price”.

[1] 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 depreciation of capital.

The MEC and capital outlays are the elements that a firm takes into account when deciding about an investment project.

With the European Commission according to its data bank "AMECO" (Annual Macro-Economic Data) the marginal efficiency of capital is defined as "Change in GDP at constant market prices of year T per unit of gross fixed capital formation at constant prices of year T-.5 [that is, lagged by half a year].