# [OPE-L:5840] Depreciation and the BEA

John R. Ernst (ernst@PIPELINE.COM)
Tue, 16 Dec 1997 03:45:09 -0500 (EST)

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1. In the U.S., the BEA has recently changed the manner
in which it computes the depreciation of fixed capital.
Prior to that change, it did use straight-line depreciation
with a twist. That is, as Duncan mentioned, types of fixed
capital were assigned a depreciation pattern according to
a "Winfrey" pattern or schedule. For example, if folding
machines of a given vintage were expected to wear out in
15 years on average, the Winfrey schedule would estimate
how many would wear out in 5 years,6 years,7 years, ... 20 years
and on to some finite number. The depreciation charges on the
5 year machines would be greater than those on the 10 year machine
even though straight line depreciation was applied to each
machine. The overall effect of the application of the Winfrey
schedule generally means that the depreciation charges are not
straight line.

Now the BEA has dropped the Winfrey bit as well as straight line
depreciation and currently computes depreciation in one of two ways:

a. Different depreciation rates are assumed for different
types of fixed capital. Let's say the rate is 1.65 and
the machine is expected to last 5 years. We divide 5 into
1.65 and obtain the annual depreciation rate of .33. For
each year of use the machine is said to lose .33 of its
"value" at the start of the year. Note that the computation
is carried out in current costs or in real terms by using
index numbers. It is interesting to observe that this is
the manner of depreciation suggested by Engels when asked
by Marx how he as an owner computed annual depreciation charges.

b. If there is a market for used fixed capital, the market
prices yield the depreciation amounts.

2. There is a bit of debate concerning how obsolescence is taken into
account. Like Marx, the BEA considers what we would call
"moral depreciation" as part of the annual depreciation charge.
Unlike Marx, it also includes losses due to fires, floods and other
types of disasters as part of depreciation.

John