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The primary difference between gross income and economic income is that gross income results from business transactions and economic income results from economic events. Gross income is realized, meaning that a transaction took place and resulted in money-in-hand income. Economic income is an increase in the book value of an asset that is unrealized until a future transaction takes place. Financial accounting standards and the U.S. tax codes define gross income (also known as accounting income). Economic income's definition comes from accepted economic theories and principles. Gross income and economic income are rarely the same.
Gross income includes the monetary receipts and gains realized from all possible income sources less the cost of goods sold, such as purchasing, manufacturing or packaging the items sold or the services rendered. “Realized” means the gain or loss is real (in terms of cash payments). Therefore, gross income is essentially the income you receive from a sale minus the cost of preparing the item sold for sale.
Gross Income Example
Examples of gross income are commonplace. Perhaps the simplest example is a street vendor selling apples. If the vendor buys apples for 25 cents each and sells them for 50 cents each, the vendor is making 25 cents gross income from each apple sold. However, if the vendor decides to step up the perceived quality of the product and wraps each apple in tissue paper, adding 2 cents to the cost of the apple, the gross income drops to 23 cents. Regardless of whether the vendor later adds oranges, bananas and cumquats for sale, the gross income remains the total revenue received (realized) minus the cost of the product and any other preparation costs (the tissue paper).
Economists define economic income as an increase in the wealth (value) of an entity that is based on economic events rather than business transactions. Another way to look at this is that economic income is an unrealized increase or decrease in the market value of an asset resulting from an external action. An item, such as a collectible, may become rare, notorious or of increased interest, or even perhaps the opposite can occur. However, because the value change remains unrealized the gain or loss of value is economic income. The value change remains economic income until the sale of the item, at which point the realized gain or loss becomes gross income.
Economic Income Example
There is more to the concept of economic income than this relatively simple explanation and example. Economic income, at its fullest definition, also includes concerns for social costs, wealth and "well-offness."
Here is a relatively simple example of economic income:
Joe paid $1,000 for a rare, vintage baseball card that is one of only a few still available. One of the duplicate cards recently sold at auction for $1,400. As a result, Joe knows that his card is reasonably worth $1,400 now, which increases the card's worth and that of his entire collection by $400. However, there is no change in his cash-on-hand. Joe decides to sell the card and gets $1,300. His gross income is $300, but because of market fluctuations, he has an economic loss of $100.
Ron Price, MBA, has extensive senior level experience in business, information technology, and education. Under his pen name Ron Gilster, Price has written over 40 books for several leading publishers on a topics ranging from business and finance to IT certifications to real estate.