Advantages & Disadvantages of Depreciation

Depreciation is a term frequently used in economics and finance that describes the loss of value over time. Depreciation can affect any asset, such as cars, real estate, stocks and even currency. Depreciation can arise from a variety of factors such as wear and tear, obsolescence and economic factors like demand for the asset. Depreciation can be both advantageous and disadvantageous.

Durable goods entail goods that do not spoil or wear out quickly. Examples of durable goods include electronics, furniture and automobiles. Most durable goods tend to depreciate over time due to general wear and tear and the introduction of new and better alternatives. The depreciation of durable goods is a disadvantage for those who buy brand new goods, because the value of new goods tends to decrease quickly. On the other hand, depreciation of goods is advantageous for those who purchase used goods; one can often buy slightly used durable goods that still work well at a fraction of the original price.

Real estate depreciation typically hurts people who own real estate and good for those in the market to purchase real estate. For instance, falling home prices will make it cheaper for someone currently renting an apartment to buy a home, while the person selling the home will get less for the sale. Real estate depreciation may also hurt local governments that collect real estate taxes because they can charge higher taxes on homes that are worth more.

Similar to real estate depreciation, the depreciation of a particular stock hurts the people that own the stock, but helps those who do not own the stock and may wish to purchase it. A common motto among stock traders is "buy low, sell high." Depreciation of stocks reduces their trading price which allows investors to purchase more shares with less money. In other words, depreciation allows investors to "buy low."

Currency depreciation, sometimes called "devaluation," constitutes the reduction of a currency's value relative to other world currencies. Currency depreciation tends to be a disadvantage for importers and an advantage to exporters. If the dollar depreciates, the cost of foreign goods will rise. This will cause consumers in the U.S. to demand fewer foreign goods. On the other hand, less valuable dollars make it cheaper for other countries to buy goods produced in the U.S.