Intermediate Goods

What are intermediate goods? What are the examples of intermediate goods and whether these are included or excluded from national income. Lets understand all these points

Intermediate Goods Key Characteristics

The key characteristics of intermediate goods and services are as discussed below.

• First, These goods have not yet crossed the boundary line of production
  • It means the goods are not yet fully ready for usage by final consumers for satisfaction of human wants. Example cloth purchased by a tailor is an intermediate good as you cannot wear cloth till it is stitched into a shirt.
• Second, These goods are used as inputs for further production
• Third, these goods are purchased for resale
• Fourth, these goods are not included for calculation of national income.
• Fifth, Whether the goods are final goods or intermediate goods depends upon the end use. We cannot say that a particular good will always be final good or always be intermediate good. It depends upon the usage.
• Sixth, the purpose of purchasing these goods is not to satisfy human wants but the purpose is further production of some other goods or services

Boundary Line of Production

In real life the goods that you use are not made at a single place. Many different producers are involved in producing the goods that you use in your daily life.

Lets take an example of production of a shirt to understand this point.

• First producer purchases cotton from farmer to make thread.
• Second producer will purchased thread to produce cloth.
• Third producer will purchase cloth to produce shirt.
• Fourth producer who is a retailer showroom near your house will buy shirt to resell. Please note that selling goods in retail is also a production activity in economics.
• Now you will go to this showroom and buy shirt.

Till the shirt was in the form of cotton, thread or cloth or at retailer showroom it is classified as intermediate goods. Only when you purchased the shirt then it becomes final goods. This is because you are buying shirt for usage or for satisfaction of a human want. Earlier people were buying different materials for further production and hence those were intermediate goods.

Intermediate goods are used as inputs for further production

These goods are used as raw material. The concept of intermediate goods applies only to a producer. Goods purchased by consumers cannot be intermediate goods.

Some examples of intermediate goods are

• Cloth purchased to produce shirt.
• Leather purchased to produce shoes.
• Sugar purchased to produce toffee. Here cloth, leather and sugar are intermediate goods

Intermediate goods are those goods which are purchased for resale

Here no manufacturing activity takes place. Goods are sold in the same condition as these are purchased. Wholesalers and retailers come under this category.

Intermediate goods are not included in national income.

This is due to the problem of double counting.

Whether goods are intermediate or final goods depends upon end use

End use means for what purpose a product is used.

Let's take an example. If sugar is purchased by a bakery for producing biscuits then sugar is an intermediate good. This is because sugar is used by producer for producing biscuits. But if sugar is purchased at your home to make tea then sugar is a final good. This is because you use sugar for satisfaction of human wants and you are a consumer and not a producer.

Intermediate Goods are not used for direct satisfaction of human wants.

Intermediate goods are used for further production of some other goods or services only

Intermediate Goods vs Capital Goods

Goods purchased by producers are intermediate goods. But not all goods and services purchased by producers are intermediate goods. Producers also purchase capital goods which are different from intermediate goods.

What is the difference between intermediate goods and capital goods? Let's understand next.

Intermediate Goods

Intermediate goods are raw materials used in production process. These goods are used up in the production process. By used up we mean that they loose their identity. Their form is changed and they become part of some other product.

Let's take an example to understand this better. When milk is used to produce chocolate then milk is an intermediate good. During the production process, milk looses its identity and it become part of chocolate. You cannot distinguish between milk and chocolate after the production process ends. Thus intermediate goods can be used only once and then they loose their identity. So these are also called Single use producer goods.

Capital Goods

On the other hand, Capital goods does not loose their identity during production process. These goods continue to be used for many years. Capital goods are used many times for producing goods for a long period of time.

In our example chocolate making machine will remain as it is even after making chocolate. The machine can be used for making a large number of chocolates for many years.

Capital Goods are part of Gross Domestic Capital Formation and are included in National Income. In the next paragraphs we will discuss examples of capital goods which are part of Gross Domestic Capital Formation

Types of Intermediate Goods

Examples of Goods Purchased for Resale

First, let's start with examples of intermediate goods which are goods purchased for resale. The producers who does this activity are known as traders. Wholesalers and retailers fall under this category.

• Medicines purchased by medicine shop near your house.
• Fire crackers purchased on deepawali by temporary shopkeepers opened during the festival.  You buy fire crackers from them and have lots of fun during the festival. 
• Notebooks, pen and other items purchased by stationary shopkeeper near your house. You buy lot of things from these shops for your studies. The stationary items that the shopkeepers are purchasing are intermediate goods. 
• Cars purchased by car dealer. Car dealer is the car showroom from where people purchase new cars.
• Fresh Fruits and Vegetables purchased by vegetable vendor near your house. Your Mom purchase vegetables from these shops and cook food for you.
• Toys purchased by toy shop from where your father used to purchased toys for you when you were a little child.
• Television, Washing machine, air conditioner, etc purchased by retailer showroom near your house or in a famous shopping mall.

Most of the shops that you find in market or in shopping malls are traders. They do not manufacture goods. They only buy already manufactured goods for reselling.

They bring the goods manufactured closer to the consumer, by opening their shops near your house, to make it convenient for you to buy goods for consumption.

Examples of Purchased for further production

Most of the items which are entered in profit and loss account will get covered under this category. This covers both goods purchased and services purchased.

First we will see examples of goods purchased which are intermediate goods. In the next section we will see examples of services purchased which are intermediate services.

Examples of Goods Purchased for use in further production

• Milk purchased by sweet shop to manufacturer sweets is an intermediate good. Other items purchased by sweet shop like sugar, dry fruits etc. are also intermediate goods.
• Purchase of cold drinks, burgers, etc. by the school canteen are intermediate goods. School will use it in production of education services. This is an example of how intermediate goods can be used to produce services.
• Wood, nails, board, paint, etc. purchased by a carpenter to manufacture furniture are intermediate goods.
• Milk, fruits, sugar, flavours, packing material, etc. purchased by an ice cream manufacturer to make ice cream are intermediate goods.
• Purchase of steel, paints, seats, tyres and other car parts by a car manufacturer are intermediate goods
• Purchase of crude oil by oil refinery to produce petrol and diesel is in intermediate good.
• Purchase of petrol and diesel, engine oil, car spare parts, car maintenance services, car washing services etc. by a cab supplier are intermediate goods and services.

Examples of Services Purchased for use in further production

• Payment of fees to a lawyer, advocate, chartered accountant, auditor, engineer or any other consultant engaged by a producer business firm is an intermediate service. Remember if these services are purchased by a household or consumer then it is not an intermediate product. In that case these are consumer services.
• Payment to a famous singer like Shreya Ghoshal for singing show during annual function of your school. School uses this service to produce education services. Payment made to any other performer, standup comedian, dancer, etcetra are also intermediate services when purchased by a producer.
• Expenditure on advertisement whether in newspaper, television, hoardings by a producer business firm is an intermediate service.
• Repairs and maintenance expenditure for school building by your school is an intermediate service.
• Payment of electricity bill by a school, college, hospital or any other producer business firm is an intermediate service.
• Payment to doctors for treatment of its employees by a producer business firm is an intermediate service. Similarly medical checkup camp of students by a school is also an intermediate service.
• Repairs and Maintenance expenditure of machines by a manufacturer business firm is an intermediate service.

Intermediate Goods vs Capital Goods Examples

• School providing education services
  • Purchase of chalk, dusters, marker pen are intermediate goods
  • Purchase of desks, chairs, computers, etc have longer life and are capital goods and included in national income as part of Gross Domestic Capital Formation.
• Example of a farmer
  • Expenditure on fertilizers, insecticides and pesticides by a farmer are intermediate goods.
  • Purchase of a tractor by a farmer is a capital good.
• Example of a hospital
  • Purchase of uniform for nurses and doctors and medicines by a hospital are intermediate goods. Hospital will use them in production of medical services.
  • Purchase of machines like X-Ray machine, CT Scan machine, etcetera by a hospital are capital goods and part of Gross domestic capital formation.
• Example of a hotel
  • Purchase of bedsheets, table covers or vegetables for cooking food are intermediate goods.
  • Purchase of furniture, televisions, air conditioners etc are capital goods.

Examples of goods purchased by producers which are part of Gross domestic capital formation

Such goods are included in national income.

• Furniture, air conditioners, film projector, sound systems, etcetera purchased by cinema hall for installation in movie theatre are capital goods
• Robots purchased by Car manufacturing companies for manufacturing cars are capital goods and part of Gross Domestic Capital Formation.
• Cars purchased by cab service companies are capital goods and part of Gross Domestic Capital formation and included in national income.
• Trucks purchased by a transportation company are capital goods and part of Gross Domestic Capital formation and included in national income.