# [OPE-L:4082] Depreciation -- S.O.S

aramos@aramos.b (aramos@aramos.bo)
Wed, 29 Jan 1997 08:02:23 -0800 (PST)

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Previous message: Gerald Levy: "[OPE-L:4081] advancing money capital"

This is a SOS message directed to the "deprecitation
people": John, Ian, Michael, Chai-on, Andrew; wolves and
sheep are also invited.

I am trying to follow your discussion but I am increasingly
lost. Maybe because I was out of OPE-L for a month. So, I
would suggest a collective numerical excercise. My main aim
is to try to understand the matter. I have no time to work
out the numerical example, but I can suggest some lines for
it.

The idea is to consider two situations:

A) Simple depreciation example

Consider a branch with 2 capitals. In this case their fixed
capital is identical in terms of technology (productivity)
and cost.

Both capitals finance their fixed capital through a debt
(credit). The amounts of annual payment coincide with the
amount of depreciated fixed capital, so that the whole
amount of \$ recovered through the sale of commodity
correponding to the fixed capital is paid to the bank.

In the table we can have two columns: one for the amount of
annualy depreciated capital (i.e. "depreciation") an
another corresponding to the "payments" to the bank. In
this simple depreciation example, both columns would have
the same numbers.

The amount of "depreciated capital" is a function of the
price of the final commodity. It is not give for the
individual (cost or technology) conditions of one or another
capital, but for the social conditions of the branch. So
that, this amount is a sort of "average".

We can consider that the fixed capital is completely
depreciated in 3 periods. For each period we can calculate
the rate of profit, that I guess change in each period
because it is calculated taking into account only the
*remaining fixed capital*.

B) Moral depreciation example

Let us suppose a case in which one of the capitals, in the
second period, has depreciated completely its old fixed
capital. Then, this capital introduces another fixed
capital which is cheaper (500f the older). The
productivity of this machine is, however, the same. The
modification involves only the price of the machine. So, we
have a branch with an heterogeneous stock of fixed capital,
in terms of its cost.

In this situation the price of the final commodity goes
down because the capital with the new machine charges less
\$ for its fixed capital. This would mean that the capital
with the old machine must accept this new price and then is
able to charge for its (old) fixed capital an amount lower
than before. How is determined the "amount of
depreciation"? As a sort of average between both capitals.
(This is true if the relations between supply and demand in
this branch remains the same.) It is obvious that this
"average" will be lower than the precedent situation, so
that the capital with the old machine can no longer cover
the payments due to the bank. The amount it has to pay for
the credit is higher than the amount of allowed
depreciation. Bankrupcy could be in the future.

Could someone help me?

Alejandro Ramos M.
29.1.97