how economic depreciation works
depreciation in economics is a measure of the amount of value an asset loses from influential factors affecting its market value asset owners may more closely consider economic depreciation over accounting depreciation if they seek to sell an asset at its market value economic depreciation affects the selling value of an asset in the market it may be followed and tracked by asset owners in business accounting economic depreciation is not typically notated on financial statement reporting for large capital assets since accountants usually use book value as the primary reporting method there can be several scenarios where economic depreciation is considered in financial analysis real estate is one of the most common examples but analysts may also consider it in other situations as well economic depreciation can also be a factor in forecasts of future revenues for goods and services economic depreciation vs accounting depreciationcalculating economic depreciation is not always as simple as in accounting depreciation in accounting depreciation a tangible asset s value decreases over time based on a set depreciation schedule with economic depreciation an asset s decreases in value are not necessarily uniform or scheduled but rather based on influential economic factors economic depreciation can often occur with real estate in periods of economic downturn or a general housing market decline economic depreciation may lead to a decrease in market value the housing market environment can play a part in real estate valuations but individual valuations may also be affected by unfavorable neighborhood construction road closures a decline in the quality of a neighborhood or other negative influences any type of negative economic factors can lead to economic depreciation and therefore a lower appraisal value the difference in value from one appraisal to the next can show a property s economic depreciation appraisals can be key to understanding economic depreciation appraisals can occur on all types of assets and are often the biggest determinant of economic depreciation financial analysts may also consider economic depreciation when forecasting future projections and cash flows economic depreciation in these scenarios would be based on the decreases in the value of revenues expected from goods or services due to negative economic influences 