Economic Depreciation

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rjonesx
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What is ‘Economic Depreciation’

Economic depreciation is a measure of the decrease in value of an asset over time. This form of depreciation usually pertains to real estate, which can lose value due to indirect causes such as the addition of new construction in close proximity to the property, road additions or closures, a decline in the quality of the neighborhood, or other external factors. Economic depreciation is different than depreciation expense on tangible assets, such as machinery or equipment.

Explaining ‘Economic Depreciation’

In periods of economic downturn or a general housing market decline, economic depreciation must be considered when a property goes through an appraisal. During the credit crisis and housing market collapse of 2008, the combination of subprime loans requiring low or no down payments with the dramatic drop in housing values resulted in a significant amount of the U.S. home owners owing more money on a home than it was actually worth.

Factoring in Liquidity

Real estate’s lack of liquidity makes the impact of economic depreciation more profound for the owner. Liquidity refers to the ability of an owner to sell an asset, and assets that sell on exchanges, such as stocks and bonds, are more liquid than real estate and other assets. If, for example, an investor wants to sell 100 shares of IBM common stock, that investor can check the bid price on a stock exchange and place a trade to sell the stock on any business day. Real estate, on the other hand, requires the seller to find a buyer, and the two parties must negotiate until the parties agree on a price. In addition, the sale normally requires an appraisal of the property, and a real estate sale can take months to complete.

Differences Between Tangible and Intangible Assets

Economic depreciation is different than the depreciation recognized for tangible assets as those assets are used to create revenue. While land does not depreciate, buildings and other tangible assets do recognize depreciation, which is the decline in value of a physical asset as the asset is used over time. Assume, for example, that a roofing company uses a truck to perform residential roofing work, and that the truck is used for seven years. As the truck is used each year to generate revenue, the company also posts depreciation expense for the decline in value of the asset. Intangible assets, such as a patent or other intellectual property, do not depreciate in value.

Economic Depreciation FAQ

What is the meaning of economic depreciation?

Economic depreciation is a proportion of the reduction in the market estimation of a resource after some time from persuasive monetary components. … In bookkeeping depreciation, a resource is discounted throughout a particular measure of time, in light of a set timetable. Sep 9, 2019

How do you calculate depreciation in economics?

Depreciation can be estimated as the adjustment in the market estimation of capital over a given period: the market cost of the capital toward the start of the period short its market cost toward the finish of the period.

What is an example of depreciation?

Models incorporate conveyance vehicles, PCs, unit portion trucks, structures, apparatuses, and hardware. – The estimation of the resource after it’s useful life. It expects that non-current resources wear out or are spent at a steady rate. Thus, the depreciation cost is a similar every time of the resource life.Depreciation is a cost that identifies with an organization’s fixed resources. It is significant on the grounds that depreciation cost speaks to the utilization of resources each bookkeeping period. Various kinds of resources can cause depreciation, offices, vehicles and gear are among the most widely recognized resources devalued.

What are the three kinds of depreciation?

Physical, functional obsolescence, and economic obsolescence.

Which one includes depreciation in economics?

The money related estimation of a resource diminishes after some time because of utilization, mileage or out of date quality. This reduction is estimated as depreciation.

What is depreciation and why is it important?

Depreciation is a cost that identifies with an organization’s fixed resources. It is significant on the grounds that depreciation cost speaks to the utilization of resources each bookkeeping period. Various kinds of resources can cause depreciation, offices, vehicles and gear are among the most widely recognized resources devalued. Jan 25, 2019

What is another name for depreciation in economics?

“Consumption of fixed capital” (CFC) has been used as a synonym for “Depreciation”.Similarly, the term “Capital consumption” has been used as well.

Further Reading

  • Issues in the measurement of economic depreciation: introductory remarks – www.questia.com [PDF]
  • The estimation of economic depreciation using vintage asset prices: An application of the Box-Cox power transformation – www.sciencedirect.com [PDF]
  • Investment demand when economic depreciation is stochastic – academic.oup.com [PDF]
  • Analysis of Economic Depreciation or Multi-Family Property – aresjournals.org [PDF]
  • Fixed capital stock depreciation in developing countries: Some evidence from firm level data – www.tandfonline.com [PDF]
  • Accounting and economic rates of return: A note on depreciation and other accruals – onlinelibrary.wiley.com [PDF]
  • Economic depreciation and accelerated depreciation: An evaluation of the Conable-Jones 10-5-3 proposal – www.jstor.org [PDF]

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