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October 12, 2007
The hidden cost of depreciation
Many costs in our economy are obvious: the cost of gas at the pump, the mortgage or rent we pay every month, and the tuition check parents of college students might pay. But there are hidden costs that are not so obvious but still as significant, says N.C. State University economist Mike Walden. Depreciation is one of them. Listen
"Depreciation occurs when the value of an asset falls. You can think of it as the using up of the value of that asset," explains Dr. Walden, a North Carolina Cooperative Extension specialist. "Now this is a common cost for businesses to account for. Businesses, for example, will account for depreciation in their buildings, in their machinery, in their technology, even in their vehicles.
"But many times I think that consumers ignore depreciation. One of the best examples of depreciation for the average person is the depreciation in their vehicle, in their car or their truck," he adds. "Let's say you go and buy a new car for $20,000. After a year you will likely find that if you tried to sell that car (even if it's in excellent shape) you could maybe only get $15,000. That $5,000 loss is what we call depreciation.
"Now depreciation also occurs in homes in the structures we live in. But usually it's overcome by the increased value of the land on which the house sits, so you don't really see it in structures but it is still there."
Posted by deeshore at October 12, 2007 08:40 AM