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Why Do Computers Depreciate?

In: Hard-to-Measure Goods and Services: Essays in Honor of Zvi Griliches

  • Michael J. Geske
  • Valerie A. Ramey
  • Matthew D. Shapiro

The value of installed computers falls rapidly and therefore computers have a very high user cost. The paper provides a complete account of the non-financial user cost of personal computers -- decomposing it into replacement cost change, obsolescence, instantaneous depreciation, and age-related depreciation. The paper uses data on the resale price of computers and a hedonic price index for new computers to achieve this decomposition. Once obsolescence is taken into account, age-related depreciation -- which is often identified as deterioration -- is estimated to be negligible. While the majority of the loss in value of used computers comes from declines in replacement cost, this paper shows the second most important source of decline in value is obsolescence. Obsolescence is accelerated by the decline in replacement cost of computers. Cheaper computing power drives developments in software and networks that make older computers less productive even though their original functionality remains intact.

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This chapter was published in:
  • Ernst R. Berndt & Charles R. Hulten, 2007. "Hard-to-Measure Goods and Services: Essays in Honor of Zvi Griliches," NBER Books, National Bureau of Economic Research, Inc, number bern07-1, May.
  • This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 0876.
    Handle: RePEc:nbr:nberch:0876
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
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    1. Mark E. Doms & Wendy E. Dunn & Stephen D. Oliner & Daniel E. Sichel, 2003. "How fast do personal computers depreciate? concepts and new estimates," Working Paper Series 2003-20, Federal Reserve Bank of San Francisco.
    2. Oliner, Stephen D, 1996. "New Evidence on the Retirement and Depreciation of Machine Tools," Economic Inquiry, Western Economic Association International, vol. 34(1), pages 57-77, January.
    3. Ernst R. Berndt & Zvi Griliches, 1990. "Price Indexes for Microcomputers: An Exploratory Study," NBER Working Papers 3378, National Bureau of Economic Research, Inc.
    4. Charles R. Hulten, 1996. "Quality Change in Capital Goods and Its Impact on Economic Growth," NBER Working Papers 5569, National Bureau of Economic Research, Inc.
    5. Jorgenson, Dale W, 1996. "Empirical Studies of Depreciation," Economic Inquiry, Western Economic Association International, vol. 34(1), pages 24-42, January.
    6. Stephen D. Oliner, 1993. "Constant-Quality Price Change , Depreciation, and Retirement of Mainframe Computers," NBER Chapters, in: Price Measurements and Their Uses, pages 19-62 National Bureau of Economic Research, Inc.
    7. Valerie A. Ramey & Matthew D. Shapiro, 2001. "Displaced Capital: A Study of Aerospace Plant Closings," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 958-992, October.
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