B Com Exam > B Com Notes > Macro Economics > Relation between MEC and MEI - Macro Economic Framework, Macroeconomics
Relation between MEC and MEI - Macro Economic Framework, Macroeconomics | Macro Economics - B Com PDF Download
Marginal Efficiency of Capital(MEC) is the rate of discount which makes the discounted present value of expected income stream equal to the cost of capital.MEC was first introduced by J.M Keynes in 1936.According to him it is an important determinant of autonomous investment.
Marginal Efficiency of Investment(MEI) is the expected rate of return on investment as additional units of investment are made under specified conditions and over a atated period of time.When cost of borrowing is high ,businesses are less motivated to borrow money and make investment on different projects because high cost of borrowing reduces profit margin of the business firms;business firms always cannot raise the price of their product and services to increase profit.
The concepts of marginal efficiency of capital(MEC) and marginal efficiency of investment (MEI) seem similar .There are however some basic differences between MEC and MEI.Some of the basic differences between MEC and MEI are as follows:
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| 1. What is the relationship between MEC and MEI in the macroeconomic framework? |  |
Ans. MEC (Marginal Efficiency of Capital) and MEI (Marginal Efficiency of Investment) are closely related concepts in macroeconomics. MEC refers to the expected rate of return on an investment project, while MEI represents the additional investment expenditure needed to achieve a certain level of output. The relationship between MEC and MEI can be summarized as follows: If MEC is greater than MEI, it suggests that the expected return on investment is higher than the additional investment required, indicating a profitable project. Conversely, if MEC is lower than MEI, it implies that the expected return is lower than the additional investment needed, indicating an unprofitable project.
| 2. How does MEC impact investment decisions in the macroeconomic framework? | |
Ans. MEC plays a crucial role in investment decisions within the macroeconomic framework. It helps determine the profitability of investment projects by comparing the expected return with the additional investment required. If the MEC is high, indicating a favorable return on investment, businesses are more likely to undertake investment projects. On the other hand, if the MEC is low, indicating a low return on investment, businesses may be hesitant to invest. Therefore, MEC serves as an important factor in guiding investment decisions, as it assesses the potential profitability of projects.
| 3. What factors influence the MEC in the macroeconomic framework? | |
Ans. Several factors influence the MEC within the macroeconomic framework. These factors include interest rates, technological advancements, business expectations, government policies, and the overall economic climate. Higher interest rates tend to decrease the MEC as the cost of borrowing increases. Technological advancements can increase the MEC by improving productivity and reducing costs. Business expectations, such as anticipated changes in consumer demand, can also impact the MEC. Additionally, government policies, such as tax incentives or regulations, can influence the MEC. Finally, the overall economic climate, including factors like inflation and economic stability, can affect the MEC as well.
| 4. How does the MEI impact the level of investment in the macroeconomic framework? | |
Ans. The MEI (Marginal Efficiency of Investment) represents the additional investment expenditure required to achieve a certain level of output. The level of investment in the macroeconomic framework is influenced by the MEI in the following ways. If the MEI is low, indicating that a small amount of additional investment is needed to achieve a desired level of output, it is likely to encourage businesses to invest more. Conversely, if the MEI is high, indicating a significant amount of additional investment is required, businesses may be reluctant to invest. Therefore, a lower MEI typically leads to higher levels of investment, while a higher MEI may discourage investment.
| 5. How can the MEC and MEI be used to assess the overall efficiency of the macroeconomic framework? | |
Ans. The MEC and MEI can be used as indicators to assess the overall efficiency of the macroeconomic framework. If the MEC is consistently higher than the MEI, it suggests that the economy is operating efficiently, as the expected return on investment exceeds the additional investment required. This indicates that businesses are making profitable investment decisions. On the other hand, if the MEC is consistently lower than the MEI, it may indicate inefficiency in the economy, as the expected return on investment is lower than the additional investment needed. This could imply that businesses are not making optimal investment decisions, potentially leading to suboptimal economic growth. Therefore, comparing the MEC and MEI can provide insights into the efficiency of the macroeconomic framework.
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