What is an Intermediate Good?
An intermediate good refers to partially finished goods that are then used as an input ton the production of other goods that become final goods. Intermediate goods are an integral part of the production process, and as such, they are also known as producer goods. When used in the production process, the intermediate good will be transformed into another product either another intermediate good or a final good sold to the end user.
- An intermediate good refers to a partially finished good that is then used in the production of other goods to become final goods.
- In order to distinguish whether intermediate goods are sold as secondary intermediate goods or as consumer goods, one would need to consider who the buyer is.
- Intermediate goods can be informally categorized into three main categories: in the first, they are produced and immediately used by the manufacturer to produce final goods; in the second, they are produced and sold in its partially completed form to other companies to produce final goods; and in the third, they are sold to another company to produce another intermediate good.
Intermediate Goods Sold as Consumer Goods
There is a unique category where intermediate goods can be sold to the end users in their raw form. Examples of such types of intermediate goods (sold as consumer goods) would be salt or sugar, which are often bought by consumers in the marketplace.
However, there are other intermediate goods that regular consumers (members of the general public) will typically not buy in their original form, such as metal or glass. In order to distinguish whether intermediate goods are sold as secondary intermediate goods or as consumer goods, one would need to consider who the buyer is.
Categories of Intermediate Goods
Intermediate goods can be informally categorized into three main categories. In the first category, they are produced and immediately used by the manufacturer to produce final goods; in the second, they are produced and sold in its partially completed form to other companies to produce final goods; and in the third, they are sold to another company to produce another intermediate good.
Here are some examples of the three categories mentioned previously, and as you can imagine, intermediate goods are often sold across different industries.
An example of a good that is produced and then used by the manufacturer as inputs into final goods may include car engines. Some car manufacturers will make their own custom car engines and then use the engines as inputs into their automobiles that are sold, once completed, to consumers.
There are many examples of goods which are produced and then sold in their partially completed form to other companies, including steel, which is used in the completion of buildings, bridges, cars, and trains; wood which is used in building homes, to make furniture and hardwood flooring; precious metals such as gold and silver used in the production of jewelry, and glass used in producing windows, ornaments, wine bottles, and photo frames.
Finally, intermediate goods can also be used to make secondary intermediate goods. For example, a farmer grows flax plants which are then sold to the miller (as an intermediate good), who breaks down the flax plant to separate out the flaxseed (commonly used in many types of healthy food). The flaxseed is then bought (as a secondary intermediate good) by a company that manufactures granola bars and then sells the final product of banana chocolate chip flaxseed granola bars to customers at the supermarket.
Intermediate Goods and GDP
The role of intermediate goods in calculating a country’s Gross Domestic Product (GDP) is a very important concept. As a reminder, GDP refers to the measure of production for a country that equals all the goods and services produced by that country or region and is a foundational concept in macroeconomics as well as in the socio-economic and political spheres.
It is important to note that intermediate goods are not included in GDP calculations, and the reason is that doing so would be “double-counting” since the final goods will also be included in GDP calculations. As such, miscalculations of GDP as a result of including intermediate goods would lead to gross overestimate of GDP.
In a simple example to illustrate the concept, imagine that a blueberry farm in Oregon grows blueberries and sells them to local grocery stores, members of the public who visit the farm in the summertime, and a jam manufacturer.
When the farm’s produce is calculated as part of U.S. GDP, the blueberries that it sold to the public will be included in the GDP calculation, while the blueberries sold to the grocery stores and the jam factory will not be. This is because the grocery stores and jam manufacturers will be selling the product to the end customers which will be included in the GDP calculation, otherwise there would be a situation of double-counting.
Services as an Intermediate Good
It should also be noted that services can also be considered intermediate goods. For example, in a photography business, the service provided developing photographs is considered the intermediate good, while the photographs themselves are considered the final good.
Other service-oriented businesses can also be classified as intermediate goods such as cleaning, landscaping, public transportation, banking, and insurance services.
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