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 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.

• 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 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.

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.

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 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. 

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

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 –

• Consumer Goods vs Capital Goods
• Non-Rivalrous Goods
• Merit Goods