Table of Contents
- What Is an Intermediate Good?
- How Intermediate Goods Work
- Intermediate Goods Example
- Intermediate Goods vs. Consumer and Capital Goods
- Intermediate Goods and Gross Domestic Product (GDP)
- Special Considerations
- What Are Other Names for Intermediate Goods?
- What Are Some Examples of Intermediate Goods?
- What Intermediate Goods Does the United States Export?
- The Bottom Line
What Is an Intermediate Good?
Let me tell you directly: an intermediate good is a product you use to produce a finished good or product, which we also call a consumer good.
You should know that certain intermediate goods can also be finished products. For instance, salt is a finished product when you buy and consume it directly as a consumer.
However, it's only an intermediate good when producers use it in manufacturing other food products. We also call intermediary goods semi-finished products.
Key Takeaways
- Intermediate goods are sold business-to-business for resale or to produce other products.
- Intermediate goods are typically used directly by a producer, sold to another company to make another intermediary good, or sold to another company to make a finished product.
- When calculating GDP, economists use the value-added approach with intermediate goods to guarantee that they are not counted twice—once when purchased and again when the final good is sold.
How Intermediate Goods Work
Intermediate goods are vital to the production process, which is why we also call them producer goods.
Companies sell these goods to other companies in the same or different industries for resale or to produce other goods. When you use them in the production process, they transform into another state.
Typically, there are three options for the use of intermediate goods: A producer may make and use their own intermediate goods. The producer may also produce the goods and then sell them, which is a highly common practice between companies and industries. Companies may buy intermediate goods to create either a secondary intermediate product or to produce a finished good.
Inevitably, all intermediate goods are either a component of the final product or completely reconfigured during the production process.
Intermediate Goods Example
Consider a farmer who grows wheat as an intermediate good: The farmer sells his crop to a miller for $100, giving the farmer $100 in value.
The miller breaks down the wheat to make flour, a secondary intermediate good. The miller sells the flour to a baker for $200 and creates $100 in value ($200 sale - $100 purchase = $100).
The final good, which is sold directly to the consumer, is bread. The baker sells all of it for $300, adding another $100 of value ($300 - $200 = $100).
The final price at which the bread is sold is equal to the value that is added at each stage in the production process ($100 + $100 + $100).
Services can also be intermediate, as in the case of a photographer. The photography is the intermediate service, while the photographs are the final product.
Intermediate Goods vs. Consumer and Capital Goods
Intermediate goods can be used in production, but they can also be consumer goods. How they are classified depends on who buys them.
If a consumer buys a bag of sugar to use at home, it is a consumer good. But if a manufacturer purchases sugar to use during the production of another product, it is an intermediate good.
On the other hand, capital goods are physical assets, such as machinery, that are purchased to be used in the production of consumer goods.
So the baker who bakes the bread in the example above will buy an oven to use in the production process. That oven is considered a capital good. It doesn’t transform or change shape, unlike the wheat.
Intermediate Goods and Gross Domestic Product (GDP)
Economists do not factor in intermediate goods when they calculate gross domestic product (GDP). GDP is a measurement of the market value of all final goods and services produced in the economy.
The reason why these goods are not part of the calculation is that they would be counted twice.
For example, if a confectioner buys sugar with which to make candy, it is only counted once and that's when the candy is sold. It isn't counted when it's bought by the confectioner for production.
This is called a value-added approach because it values every stage of production involved in producing a final good.
Special Considerations
There are many intermediate goods that can be used for multiple purposes. Steel is an example of an intermediate good. It can be used in the construction of homes, cars, bridges, planes, and countless other products.
Wood is used to make flooring and furniture. Glass is used in the production of windows and eyeglasses. Precious metals like gold and silver are used to make decorations, housing fixtures, and jewelry.
What Are Other Names for Intermediate Goods?
Intermediate goods are also called semi-finished products, because they are used as inputs for a finished product. They're also called producer goods because they are vital to the production process.
What Are Some Examples of Intermediate Goods?
Examples of intermediate goods include flour, precious metals, salt, steel, sugar, wheat, and wood.
What Intermediate Goods Does the United States Export?
A few examples of intermediate goods exported by the U.S. include crude oil, non-monetary gold, finished metal shapes, and automotive parts and engines.
The Bottom Line
Intermediate goods are products used in the production process that makes other goods.
These newly produced goods can also be intermediate goods which will be used in yet another production process. Or they can be finished products that are ultimately sold to consumers.
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