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In the age of rapid technological change, there seems to be no need in addressing the significance of technology as it is everywhere–from your dorm to classrooms, from your favorite dining hall to the shopping center. However, you may have experienced certain awkward situations where technological devices fail to operate properly. For instance, your professor is about to start their lecture, but their presentation seems or not load. Calling for help from an IT staff may take time so some professors may choose to continue with the lecture anyways. Can we explain this situation from an economic perspective? A potential answer can perhaps be found in the depreciation rate.
Firstly, what is the depreciation rate? It basically refers to the percentage of assets that depreciate during each period. The teaching devices in the classroom have their depreciation rate, which means they will gradually be obsolete or start to have a variety of problems across their productive life. The most common way to get the depreciation rate is the straight-line method, dividing 1 by the useful life of that asset. And the depreciation value will be the difference between the cost of the asset and the salvage value of the asset, divided by the depreciation rate. In macroeconomics, it can further affect the value of capital, thus the GDP, as the capital during each year (K) is calculated by previous K+Investment in K -depreciation rate*previous K.
Back to the common technology issue we might all experience in class. If we start a clock while we meet such a problem, we can apply the concept of the depreciation rate by noticing the accumulation of time loss. Professors might pause the class to wait for help.
But how does it matter for individuals? One of the most straightforward ways to think about its effects on our daily lives is how it factors into our investment choice. Now, more and more people choose to invest with their extra money, instead of putting it in the bank and waiting for low returns. Depreciation rate might be taken in your consideration if you would like to invest in any asset, as you are expecting this asset to bring you more money. For instance, someone would argue that investing on real estate can be a good choice. It indeed has a relatively low depreciation rate. But even though the house is going to depreciate, the land will not. Moreover, renting the real estate out can bring income, and the tax burden can be reduced through depreciation allowances (Thomas Black). As a trade-off, you will need to pay for the maintenance of the house, and the time you devote on finding tenants might be an opportunity cost. But generally speaking, this investment can bring great benefit.
To sum up, depreciation rate matters in a variety of perspectives, in terms of a country’s GDP or individuals’ investment strategy. Assets can rarely be never obsolete, thus we need to be more prudent while making choices.
Sources:
https://bench.co/blog/tax-tips/depreciation/
https://www.wallstreetmojo.com/depreciation-rate/
https://www.forbes.com/sites/forbesrealestatecouncil/2018/03/09/why-depreciation-is-the-biggest-perk-of-real-estate-investing/?sh=5f8396627471
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