What is depreciation and why is it included in GDP?

What is depreciation and why is it included in GDP? 

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thanatassa eNotes educator| Certified Educator

Depreciation is a way accountants try to create a monetary representation of the value of a tangible asset over time based on the way that one assumes the asset to have its value be consumed over time. 

Imagine, for example, that a city builds a bridge that improves transportation links and trade. This bridge makes a positive contribution to GDP. The bridge doesn't just remain in perfect shape forever, though. It has a fixed lifespan and requires ongoing repairs. Many tangible assets depreciate, including real estate, factories, tools, and IT equipment. Depreciation, therefore, acts as a form of net loss.

Unless one factors in depreciation, politicians and executives can make themselves look good by deferring maintenance and infrastructure work to inflate GDP or value artificially. A business using 10-year-old computers might have more cash on hand than a company that spent money to upgrade its computers, but realistically, a company using obsolete technology will need to upgrade, and the decline in value of the obsolete IT is actually a form of liability; depreciation is a way of measuring this.