ABSTRACT
Historically, there has also been confusion as to how to account for depreciation as well as efciency. It is easy to establish the purchase price of a capital good. It is not so easy to account for how much the value of the capital good is reduced over time. For the sake of simplicity, there tends to be three approaches that are widely accepted. Under the constant efciency pattern, or “one-hoss-shay” pattern, capital retains its full value until it is no longer usable. The straight-line pattern dictates that the value of capital is reduced linearly until it is no longer used. Using the geometric decay pattern, the productive capacity of a capital good decays at a constant rate. However, these patterns describing the change of efciency over time should not be confused with depreciation. In fact, it is only the geometric pattern that can be used to describe the path of efciency as well as depreciation (Hulten and Wykoff 1996).
