If you have ever purchased or sold a used car, chances are you experienced the effects of depreciation first hand, whether you knew it or not. Depreciation is the loss of value of a durable good or asset over time. Almost any tangible good or asset, including cars, electronics, furniture, real estate, shares of stock and currency, can experience deprecation. There are many different reasons an asset could depreciate.
Obsolescence is one of the main causes of the depreciation of goods that rely heavily upon current technology. For instance, a new TV with the latest features might be worth $1,000 today, but a few years from now, it might be considered outdated, which could significantly reduce its value. It is not uncommon for electronic devices to lose half of their value after a few years. A 10-year-old computer might not even be able to run common software applications in modern use.
Aging and Damage
Another cause of depreciation of goods and assets is aging and wear and tear that result from use over time. Automobiles are a classic example of goods that depreciate over time due to age and wear. A 10-year-old car is not necessarily obsolete -- it can still get you from point A to point B -- but after driving thousands of miles, the engine and other parts likely will be worn and may require frequent maintenance.
The demand for a certain good or asset can cause depreciation. For instance, if nobody wants to buy the stock of a certain company, the stock's value will fall or depreciate over time. Similarly, if a certain type of product goes out of style, decreased demand would lead to depreciation. In some cases, demand might be reduced by factors other than simple preferences. For instance, if the economy goes into a recession and average incomes fall, demand for goods might be reduced because consumers have fewer disposable resources.
Currency depreciation occurs when one currency loses value with respect to another currency, which is reflected in the currency exchange rate. For instance, if the euro can buy $1.50 today, but only $1.40 a month from now, the euro has depreciated. There are many potential causes of currency depreciation such as political instability and inflation. When a currency depreciates, goods sold by the country become relatively cheaper, which tends to encourage exports.