EFA (42): Gross and net

The terms "gross" and "net" are often used in economics to refer to key economic variables. But what exactly do these terms mean? This is the subject of the 42nd item in our Economics for Amateurs (EFA) series, which you can find here each Monday.

"Gross" is a very flexible word in English. Here are just some of the possibilities, with definitions from The Oxford Dictionary of English:

• It can be used as a noun: "an amount equal to twelve dozen (144)".
• It can be a verb: "produce or earn (an amount of money) as gross profit or income". This meaning is often used in connection with films: "The filmed grossed over a billion dollars".
• It can be used as an adjective: "unattractively fat or bloated", "very rude or coarse", or "very obvious and unacceptable" (a gross abuse of human rights).

In economics, the most common use is as an adjective meaning: "without  deduction of tax or other contributions...often contrasted with net".

So, the gross wage is the full amount that the employer has to payn the employee, while net wage is what the employee receives, after the deduction of income taxes, social insurance contributions, etc.

Likewise, gross interest is the interest before tax and gross profits are the total profits before any deductions such as taxes or depreciation. (Somewhat confusingly, the terms “net income”  or simply "net" are often used as synonyms for total profits.)

Another area in which "gross" and "net" are commonly used is to talk about a country's output of goods and services. The most common measure is gross domestic product (GDP) — the total output of goods and services within a country’s borders. For more details, see here.

An alternative measure, gross national product (GNP), includes income from abroad, such as profits made by branches and subsidiaries in other countries, and interest payments on foreign investments. At the same time, GNP excludes income generated in the domestic economy that is sent abroad to foreigners.

The word “gross” in “gross domestic/national product" refers to the total output without any deductions. Net domestic/national product is lower because part of the output in any year has to be used to replace that part of a country's fixed assets (factories, machinery, etc.) that is "used up" via depreciation (wear and tear, obsolescence, etc. For more about depreciation, see here).

Often, the term "national income" is used in a general sense to described a country's output in any year. In fact, its precise economic meaning is net national product.

The term “net” is used more generally in other business contexts. If, for example, a change leads to both positive and negative results, but the positive ones outweigh the negative ones, we talk about a “net gain” or "net benefit".