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Economic Depreciation

Candlefocus Editor
Economic depreciation is a measure of the decrease in the market value of an asset over time from influential economic factors. Economic depreciation can be important for people and organizations seeking to sell an asset in the open market, as it can give an indication of how much the asset can be realistically sold for. For example, a house that may cost $500,000 in a booming economy may decrease to $450,000 if the economy suddenly dives into recession. While accounting depreciation simply reduces the value of an asset over a predetermined time period and is often the same amongst assets of similar types, economic depreciation takes into account external economic influences and is unique to each particular asset.

Economic depreciation includes factors such as global market conditions, supply and demand, inflation and deflation, changes in the industry and other exogenous factors, such as environmental catastrophes as all of these can have an effect on the value of an asset. For instance, a property may experience economic depreciation if it is located in an area affected by a natural disaster, while a trade-in vehicle may experience economic depreciation if the demand for the type of car is decreasing. Other external factors that can affect the value of an asset over time include the introduction of a competitive substitute for the asset, technological innovation, government policies and regulations, taxation, politics and so on.

Furthermore, one should also consider physical depreciation when measuring the economic depreciation of an asset. Physical depreciation describes the gradual deterioration of an asset caused by its age, wear and tear, and other accidental circumstances. Examples of physical depreciation include fading paint on a house, rusting on an old car, tearing of a carpet, and so on. It is important to account for physical depreciation when measuring economic depreciation, as it can have a significant effect on the value of an asset.

In conclusion, economic depreciation is a measure that is important to take into consideration when assessing the value of an asset, as it takes into account the various external economic factors that can influence the market value of the asset. By considering both economic and physical depreciation, one can get a more accurate view of the actual value of an asset and be able to make more informed economic decisions with regards to the asset.

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