Definition
An intermediate good or consumer good is a product that is used to produce finished goods or products. Some intermediate goods can be directly used without further processing in the industry to make another product or the same goods can be used for producing another good. For example, salt can be used directly by the consumers or it can be further processed by different industries to make other products such as in the glass manufacturing industry.
Since these intermediate products can be further used in the production of other goods, they are referred to as “semi-finished products”. In other words, they become inputs in the production of another product. In this article, students will learn about what makes intermediate products different from final goods, and the examples and cost of production of intermediate goods.
Final Goods vs Intermediate Goods
Final Goods:
In simple words, final goods are the finished products of production which are ready for consumption or reinvestment.
In terms of customer consumption, final goods are those goods that are purchased for consumption such as milk. Although milk can be industrially processed to make other products such as curd or sweets as a final good, milk is used for consumption.
In terms of industrial usage, goods that are used by firms as capital formation or investment such as machines produced from one firm and purchased by another for which it is a final product.
Intermediate Goods:
Those goods that are meant for resale or reuse in the same accounting year are intermediate goods.
Example of resale of intermediate goods: milk purchased by a retailer for selling to the customers.
Example of reuse of intermediate goods: milk purchased by sweet shops to make sweets.
Examples of Intermediate Goods
It is to be noted that intermediate goods are not the same as capital goods. Machinery, land or tools that are used as factors of production are regarded as capital goods. Capital goods are not included in the final product but intermediate goods can be included in the final product.
In building a house, the radial saw used to cut wood is a capital good while the plywood used in the flooring is an intermediate good. The house is the final product.
Cost
Intermediate goods are the links between the raw materials and the final products in a production process. They are also seen as inputs. Therefore, these goods have an additional value that cannot be classified with raw materials.
FAQs on What Are Intermediate Goods? Explained
1. What are intermediate goods in economics?
Intermediate goods are products used by businesses in the production process to create other goods or services. They are not sold to the final consumer in their original form. Instead, they are either transformed into a final product or resold to another producer. The key characteristic is that they are used up or resold within the same accounting year.
2. What are some common examples of intermediate goods?
Examples of intermediate goods vary across industries. Here are a few common ones:
Flour used by a bakery to make bread.
Steel used by a car manufacturer to build a car's body.
Wood used by a furniture maker to create a table.
Sugar purchased by a sweet shop to make sweets.
3. How are intermediate goods different from final goods?
The primary difference is their end-use. Intermediate goods are inputs for further production (e.g., cotton used to make a shirt). Final goods are products ready for final consumption by households or for investment by firms (e.g., the finished shirt sold to a customer). The same item, like sugar, can be an intermediate good for a bakery but a final good for a household.
4. What is the key distinction between intermediate goods and capital goods?
The key distinction lies in their role and lifespan in production. Intermediate goods, like raw materials, are consumed or transformed during the production process. In contrast, capital goods are fixed assets, such as machinery, tools, and buildings, that are used repeatedly over several years to produce other goods but are not used up in a single production cycle.
5. Why is the value of intermediate goods not included when calculating a country's Gross Domestic Product (GDP)?
The value of intermediate goods is excluded from GDP calculations to avoid the problem of 'double counting'. The value of these goods is already embedded in the market price of the final product. For example, the cost of the flour is included in the price of the bread. Counting both would artificially inflate the GDP figure and give an inaccurate measure of the nation's output.
6. Is it the nature of a good or its end-use that classifies it as 'intermediate'?
It is always the end-use of a good that determines its classification, not the nature of the good itself. For instance, a sheet of paper is an intermediate good when purchased by a publisher to print a book. However, the same sheet of paper is a final good when purchased by a student for making notes. The classification depends entirely on who the final purchaser is and for what purpose it is used.
7. In a car manufacturing plant, which components are typically considered intermediate goods?
In a car manufacturing plant, nearly all components purchased from other suppliers are intermediate goods because they are used to produce the final car. These include:
Tires
Engine components
Steel and aluminium sheets
Glass for windows
Seats and upholstery
The finished car is the final good, and the value of all these intermediate goods is included in its final price.
