The form and rate of physical depreciation in Canadian industries 1

Abstract

Economic depreciation has been studied extensively by many researchers, but there are very few studies on physical depreciation. The voluminous empirical research studies on economic depreciation in economic literature indicate that economic depreciation is much easier to estimate than physical depreciation. There are some differences in the measurement of physical depreciation between the engineering and the economic point of view. An asset in its early age may have to be retired because of economic reasons due to technological change. This makes the empirical measurement of physical depreciation even more difficult. In this paper, we derive a formula which can transform economic depreciation into physical depreciation. The transformation will provide us a consistent measurement of physical depreciation vis-a-vis economic depreciation.

Two different parametric forms are also studied in this paper. The almost perfect match between the Box–Cox power transformation form and the converted form of physical depreciation further proves that the former is one of the most flexible functional forms especially well suited to the problem of analyzing depreciation patterns. The estimated curvature parameter of the Beta-decay form is negative for all Canadian industry components. The convex form of physical depreciation of the Canadian experience is contrary to the concave forms assumed by the Bureaus of Labor Statistics of the US in its capital stock estimates for the input-output industries.