An intermediate good is a product that is used to produce a final good also known as the finished product, intermediate goods are referred to as the consumer good. Intermediate goods can also be a final good for some industries since it is consumed directly by consumers, while the same good can be used by producers to manufacture other food products.
For example, salt can be sold as final goods as well as it can be sold for further making an end product that is a beverage.
These Intermediate goods are sold between two or many industries for resale or the production of further goods. These goods are also called semi-finished products as they are used as inputs to become part of the other finished products.
Final and Intermediate Good
Final goods are referred to as those goods which are used for consumption or re-investment.
To make it clearer we will provide a few examples. The Final Goods include:
Goods that are purchased by the consumer. The households purchase milk for consumption purposes. They are meant for final use only.
Goods that are purchased by the firms in order as capital formation or investment like the machinery that is purchased by a business firm.
To be noted: Final goods are not for resale neither they are used for any further transformation in the process of production.
Intermediate goods are those goods that are used either for the resale or for further production in the same accounting year.
Intermediate Goods include the following:
How to Classify Goods as Intermediate Goods and Final Goods?
The distinction which is created between the intermediate goods and the final goods is based on the usage of the product and not on the basis of the product individually. A commodity can be both, an intermediate good as well as a final good, this depends upon the nature of its use.
Sugar may be an intermediate good when it is further processed for making sweets. While this is a final good if used by the consumers directly for consumption.
Similarly, the milk is an intermediate good when used in the dairy shops for resale or processed into chocolates or cheese. However, this becomes a final good when the milk is used by the households.
So, this is to be noted that the distinction is made on the basis of their end-use. If the end-use of good is consumption or investment, then this is a final good. If the good is used for resale or further production, particularly in the same year, then it is an intermediate good.
Example of Intermediate Product
Intermediate goods are required to be distinguished from capital goods. A capital good is the machinery, land, or tools that are used in the production and while distribution of a good or service. Unlike intermediate goods, capital goods are not included in the final product. While here the manufacturers use capital goods in the production of other goods or services to improve a business firm’s productivity or increase the output.
Jack is a building contractor. He uses the radial saw as a capital good, but the plywood that he uses as flooring in a house is an intermediate good. At last, the house is the final product, the radial saw is a capital good while the plywood is an intermediate good as it is contained in the house.
Also, services can be intermediate. For example, if a videographer works in a film, the video that is sold, here the videographer is offering an intermediate service. While the video is the final product and the value of the videographer’s service is included in the price of the making of the video.
Cost of Intermediate Goods
Intermediate goods are the goods that are used as inputs in the production of the final goods. They act as connecting a link between the raw materials and the final good. The intermediate goods possess an additional value over the raw materials, which cannot be classified with them. They are also known as semi-finished or producer goods.