Introduction

Intermediate goods are important intermediaries in the production process and hence they are very important in nature. These goods change or create new goods so that the final product could be made and reached the final consumer. Apart from creating intermediate goods, industries purchase and sell intermediate goods amongst each other. Knowing about the process of production of intermediate goods, therefore, can be beneficial for developing business expertise.

What are Intermediate Goods?

Intermediate goods are the goods or items that are unfinished items that can be used to process or transformed to make other goods. Companies may alter, merge or modify materials before producing and then selling a finished product to a client or customer.

For example, a hard drive can be considered intermediate good in the construction of a computer. Sometimes, companies sell intermediate goods directly to another producer who may consider the product as a finished good.

For example, studio equipment can be considered as an intermediate good where the final product is a music track.

Businesses may produce their own intermediate goods, or intermediate goods may be produced to sell to other businesses. Some others may purchase needed intermediate goods to aid their ultimate output. Some industries term these goods as producer goods. A consumer good which can also be an intermediate good is a product that helps in creating the finished product.

For example, Salt may be a finished product because customers consume it directly. It can also be considered an intermediate good because producers use it to make additional food items. Producers also exchange intermediate products between industries for use or resale in the production of other goods.

How do Intermediate Goods Work?

More than one transformation and more than one intermediate good may go into the production of one final good. Moreover, in each step of the creation of a finished good, there may be the inclusion of a new intermediate product. Sometimes, an intermediate good can be a service too. A strategy known as value addition can help estimate how intermediate goods contribute to a country’s income. This approach checks and records the value of a product in each production stage.

There are generally three possibilities for using or utilizing intermediate goods.

• A producer can produce and use their own intermediate goods.
• A manufacturer can manufacture the goods and then sell them, which is a very common practice in many industries.
• Companies may also purchase intermediate goods intending to use them to make a secondary intermediate product or to produce a finished good.

Eventually, all intermediate goods usually become part of the final product or undergo full remodeling along the manufacturing process to make the finished product.

How to Classify Goods as Intermediate and Final?

It is sometimes important to classify the products into finished and intermediate goods. For doing so, one must check the intended use or purpose of the product. If the product is going to serve a certain function or purpose, it may be classified as intermediate while if it is a final product itself, it may be kept out of the intermediate category. Salt is a good example to illustrate this theory. Salt can be used to cook many foods where it serves as an intermediate good while when it is consumed directly it is a finished product.

Examples of Intermediate Goods

Intermediate goods are items that are used to create, transform and manufacture a broad range of finished products. Whenever an item is used to manufacture an item, even if it is a finished product in another sense, it is called an intermediate good. Some of the intermediate goods can be sold directly to consumers too. When finished goods are used as another distinguishable item for sale, they become intermediate goods.

Some examples of intermediate goods include:

Salt: Salt is a very common intermediate good as it appears in the final product of several consumable and non-consumable items.

Glass: Glass is used as an intermediate item in many other finished products, such as windows and doors, while slightly transforming its purpose.

Wheat: Wheat often becomes part of food, and this makes it an intermediate item.

Wood: Wood can be processed in many ways to create construction materials and household items.

Steel: Steel is another intermediate good that helps in creating final products for many industries, such as transportation and construction.

Precious metals: Precious Metals such as silver and gold are excellent examples of intermediate goods. These metals contribute to different finished products, such as jewelry and lifestyle accessories. Precious metals are also used in some electronic items such as solar panels.

Mechanical components: The many parts of mechanical components that go into the production of automobiles and machinery are intermediate goods. They serve an important purpose by being a part of the finished product.

Paint: Paints, decorative items, and substances are intermediate goods because they can be applied to get final goods to enhance the visual appeal as part of a production process.

Hardware: Hardware and fittings are intermediate goods when they are combined and transformed into a final product.

What is the Relation Between Intermediate Goods and Gross Domestic Product (GDP)?

The value of intermediate products is not counted when calculating gross domestic product. GDP is the total market value of all finished goods and services of an economy. The price of intermediate goods, if counted, will lead to double entry of the product. The final value of the finished goods contains the value of the intermediate goods.

Therefore, the price of salt would be considered only when the burger is being sold and not at the point of sale of the salt. When someone takes into consideration each stage of production that contributes to the final product, they may be following an approach of value addition.

Therefore, the main reason for not considering intermediate goods in GDP calculations is to double-count the value of the items. The standard industry practice is to calculate the price of material only once in the entire process of production.

Conclusion

It is important to learn and have knowledge about intermediate goods because they play a major role in the production economy of a nation. Moreover, they must be known because their values must be ignored while calculating the GDP of a nation. As counting the values of intermediate goods lead to double entry, their values are not included in the calculation of GDP calculation.

Therefore, one must differentiate intermediate goods from final products in order to calculate the error-free GDP which is a very important calculation for the economy of the country.

FAQs

Q1. What is meant by intermediate goods?

Ans. Intermediate goods are the goods or items that are unfinished items that can be used to process or transformed to make other goods. Companies may alter, merge or modify materials before producing and then selling a finished product to a client or customer which requires intermediate goods.

Q2. What are the most common three possibilities for using intermediate goods?

Ans. There are generally three possibilities for using or utilizing intermediate goods.

• A producer can produce and use their own intermediate goods.
• A manufacturer can manufacture the goods and then sell them, which is a very common practice in many industries.
• Companies may also purchase intermediate goods intending to use them to make a secondary intermediate product or to produce a finished good.

Q3. Give three examples of intermediate goods.

Ans. Common three examples of intermediate goods are:

Salt: Salt is a very common intermediate good as it appears in the final product of several consumable and non-consumable items.

Glass: Glass is used as an intermediate item in many other finished products, such as windows and doors, while slightly transforming its purpose.

Wheat: Wheat often becomes part of food, and this makes it an intermediate item.