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Intermediate Goods

Updated on January 29, 2024
Article byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is An Intermediate Goods?

An intermediate goods is a product or commodity used as input to produce other goods or services. It may not necessarily be meant for direct consumption or use by end users but utilized by other businesses, industries, or factories for further processing.

Intermediate Goods

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Intermediate goods are also called semi-finished goods as they undergo transformation or processing to become finished products. However, they can also be sold by entities involved in resale businesses. Some intermediate goods used to produce finished goods are also considered consumer goods since they are consumed by end users. For instance, salt and sugar are both intermediate and consumer goods.

Key Takeaways

  • An intermediate good, intermediate product or semi-finished product is a commodity used as raw material/input in the production process of another good or service.
  • Unlike final goods, intermediate goods are not intended for direct consumption by end consumers. Certain exceptions where intermediate goods are used as consumer goods may exist. For example, salt and sugar.
  • Three major categories of intermediate goods in economics are In-house Goods, B2B Finished, and B2B Intermediate.
  • Intermediate goods are not counted in the country’s GDP to avoid double counting since their value is already accounted for in the final goods used in GDP calculation.

Intermediate Good Explained

Intermediate goods or semi-finished products are primarily purchased by businesses to facilitate production. Typically, such goods are not purchased by individuals or households for direct consumption. Some examples are raw materials, components, parts, and sub-assemblies. These goods are vital to production and supply chain as they help transform raw materials into final goods or services. These goods have a derived demand, i.e., their demand relies on the demand for final goods in the market. Also, if a business does not use an intermediate product in the same year, it is shown as a final good in the next year’s accounting books.

However, whether an item is classified as intermediate or final may change based on the industry or buyer type. An item may be considered an intermediate good in one industry but a final product in another. Steel produced by a steel manufacturer can be considered an example of such a product. It is usually sold to other industries for further processing. Steel is the manufacturer’s finished product. However, it is an intermediate item for a manufacturer producing kitchen equipment. It becomes final goods when kitchen sinks manufactured using this steel are sold to customers.

Also, recognizing a good as an intermediate item depends on its use. For instance, arms, vehicles, tankers, etc., used in the military are final goods but serve as intermediate goods since they are used to provide defense services.

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Categories

Intermediate goods in economics can be classified into the following different categories based on their characteristics and production usage:

  • In-house Goods: These are raw materials produced and used by the same organization to create final products. They may be extracted or harvested from natural sources. Examples include crude oil, iron ore, timber, cotton, and various agricultural products.
  • Business to Business (B2B) Finished: These semi-finished goods have undergone some processing but are yet to be declared ready for final use. Hence, such goods are sold from industry to industry for additional processing or assembly before they reach customers. Some examples are steel billets, yarn, unfinished furniture, and partially processed food items.
  • Business to Business (B2B) Intermediate: Such intermediate goods are produced as raw material or input for manufacturing other intermediate products. Thus, these commodities undergo multiple production processes before they reach the end consumers. An example is the cotton used to produce thread. Thread is an intermediate item for garment manufacturers.

Examples

Let us consider the following examples to understand the concept and how these contribute to a nation’s economic health:

Example #1

Below are some common forms of intermediate goods used in production.

  • Components and Parts: These intermediate goods are individual units or pieces manufactured separately and integrated into the final product during assembly. They often require further processing or assembly to become a complete product. Examples are electronic components, engine parts, circuit boards, and fasteners.
  • Sub-assemblies: Such intermediate goods are partially assembled units used to make a final product. They are manufactured by specialized manufacturers and incorporated into the final product during assembly. Examples are car engines, computer motherboards, and prefabricated building components.
  • Packaging Materials: These goods carry, cover, protect, and present final products to consumers. They are crucial in the marketing and distribution of finished goods. Examples are boxes, bottles, cans, labels, and wrapping materials.
  • Energy and Fuel: Energy and fuel are considered intermediate goods as they are vital to the production process. They are consumed during production but are not part of the final product. Examples include electricity, natural gas, coal, and oil used to power machinery & equipment.

Example #2

A World Trade Organization (WTO) study about intermediate goods reported a continuing growth streak in the intermediate goods exported worldwide in 2021 (Q4). However, the 21% year-on-year growth declined compared to the previous quarter, which stood at 27% in Q3. The prominent intermediate goods during this period were metals, crops, food products, etc.

Intermediate Good And GDP

Intermediate goods are incorporated into the production of final goods or services. They indirectly impact a nation’s Gross Domestic Product (GDP). GDP is a macroeconomic indicator that measures the comprehensive value of all final goods and services manufactured or produced within a nation’s borders during a specific period or year. It estimates a country’s size and economic health.

Only the value of final products is accounted for when determining GDP. Intermediate goods are not factored into a country’s GDP computation since their value is already accounted for in the final goods produced. Including their value in GDP calculations would result in double-counting. Hence, by focusing on the final goods and services, GDP measures the value added at each economic production stage. It captures the overall economic activity and enables economic output comparisons between countries.

Consider the example of a mixer grinder manufacturer. While producing mixer grinders, the company uses intermediate goods like steel, wires, plastic, etc. Their values are already considered in the cost of mixer grinders sold to consumers. Consequently, when calculating GDP, only the value of the final product, mixer grinders, is accounted for. Intermediate goods used in production are not included to discourage double-counting. 

Intermediate Good vs Final Good vs Capital Good

Distinguishing between intermediate, final, and capital goods is essential for economic analysis and GDP calculation. Following are the differences between the three types:

BasisIntermediate GoodFinal GoodCapital Good
DefinitionAn intermediate good is any commodity or product that serves as raw material/input in the production of other goods or services.  A final good, or consumer good, is obtained post-production and is intended to satisfy the needs or wants of consumers directly.A capital good, often referred to as a producer or durable good, is a commodity employed by businesses, producers, and manufacturers to produce other goods or services.
BuyerProducers, manufacturers, and other businesses buy them.Individual or household consumers buy them.Producers, manufacturers, and other businesses buy them.
SellerProducers and manufacturers sell them.Retail outlets or other distribution channels sell them.Large business units, producers, and manufacturers sell them.
UseThey undergo further processing or transformation at industries, factories, and other premises that produce the final product.These are purchased by individuals or households for personal use or consumption.They enhance productivity and facilitate the creation of other goods and services; such goods are considered investments by businesses because they contribute to output and economic growth.
DurabilityThey are exhausted or depleted in the production process.Perishable and non-durable consumer goods are exhausted or depleted when consumed or used by end users, while durable goods are long-lasting and can be used repeatedly for an extended period.They are long-lasting and can be used repeatedly over an extended period.
Require Value AdditionSuch goods undergo value addition through additional processing.These goods do not require value addition.With time, these goods need to be maintained, renovated, or replaced.
ConditionThese are raw, semi-finished, and unsuitable for direct consumption or use by consumers.Finished products are available for direct consumption or use by the end users.These goods are prone to decreased efficiency and may become worn out and obsolete after an extended period of use.
GDP CalculationIntermediate goods are not counted in the GDP to steer clear of double-counting.These goods are considered for GDP computation.These goods are considered for GDP computation.
ExamplesRaw materials like iron, cement, and plastic; components or parts like wires and circuits; packaging materials like cardboard boxes, cans, and labelsFood, clothing, automobiles, smartphones, and furnitureMachinery, equipment, buildings, tools, and vehicles employed in the production process

Frequently Asked Questions (FAQs)

1. Which of the following is an intermediate good?

– Gold
– Vegetables
– Building
– Television
 
While gold and vegetables are intermediate goods when used by goldsmiths and restaurants, a building is a capital good. Television is a final good used by consumers. Also, vegetables can be final goods when purchased by household consumers.

2. What are not intermediate goods in economics?

Any commodity or product which does not require further processing for value addition and is available to end users or consumers for direct consumption cannot be classified as an intermediate product.

3. Is wheat a final or intermediate product?

Wheat is both an intermediate and a final product. Since it can be used as raw material by flour mills, it is an intermediate good. If it is purchased for household consumption, it is a final good.

4. Is machinery a final or intermediate good?

Machinery, such as electronic appliances, is considered a final good when a consumer purchases it for personal use. However, machinery purchased by producers, manufacturers, and industries to support manufacturing is classified as capital goods.

This has been a guide to What Is Intermediate Good. We explain its examples, comparison with final and capital goods, categories, and relation with GDP. You can learn more about it from the following articles –

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