An intermediate good is pivotal in manufacturing final goods or consumer products. Salt is a great example—it can be consumed directly by individuals and used by companies to create various food items. Intermediate goods are crucial in the industrial chain as they are traded between industries for resale or further production, often referred to as semi-finished products.
Key Takeaways
- Intermediate goods are essential for manufacturing other products, ultimately reaching consumers.
- These goods are exchanged between industries for various purposes, including further processing or resale.
- They can be transformed during production into another state or final product.
- The value-added approach ensures intermediate goods are not double-counted in GDP calculations.
How Intermediate Goods Work
Intermediate goods, also known as producer goods, are fundamental in the production process. Industries trade these goods to either incorporate them into other products or resell. The transformation of intermediate goods through the production process is crucial in bringing products to their final form.
Typically, there are three main uses for intermediate goods:
- Self-Use: A producer manufactures and utilizes his intermediate goods.
- Industrial Trade: A common practice where goods are sold between producers in different industries.
- Final Production: Companies buy intermediate goods to create either another intermediate product or a finished good.
Illuminating Example of Intermediate Goods in Action
Consider a farmer who grows wheat. He sells his crop to a miller for $100, attributing $100 in value to the farmer. The miller then processes the wheat into flour—an intermediate good. The flour sells to a baker for $200, which adds another $100 in value ($200 sales - $100 purchase cost = $100 added value). Finally, the baker makes bread, selling it for $300, contributing an additional $100 of value ($300 - $200 = $100). The total sale value of the bread equals all value additions across production ($100 + $100 + $100).
Intermediate Goods Versus Consumer and Capital Goods
Intermediate goods are versatile—they can be consumer goods depending on the buyer. For instance, sugar bought by a consumer is a consumer good, but when bought by a manufacturer for production, it becomes an intermediate good.
Conversely, Capital goods are assets utilized to produce consumer goods, like an oven in a bakery. Unlike intermediate goods, capital goods do not morph or shift in shape throughout production.
Intermediate Goods and GDP
Economists exclude intermediate goods from GDP calculations. GDP measures the market value of all final goods and services to prevent double-counting. When intermediate goods like sugar are purchased by a confectioner for candy production, only the final product (candy) sale is included in GDP to avoid redundancy. Value-added approach evaluates each production stage, securing accurate GDP representation.
Special Considerations
Intermediate goods often have versatile applications. Steel is one such good. It’s essential in constructing homes, cars, bridges, and planes. Similarly, wood finds its use in flooring, furniture, or structures; glass transforms into windows or eyeglasses; even precious metals like gold and silver are utilized in decorations, housing features, and jewelry.
Intermediate goods signify criticalness in production and underpin the economy by facilitating the conversion of raw inputs into valuable consumer products.
Related Terms: consumer goods, capital goods, GDP, value-added, market value.
