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Intermediate Goods: Meaning and Examples

Intermediate goods are products used to produce final goods or consumer goods. Examples include raw materials, components, and semi-finished products. Learn about the Intermediate Goods here.

Mridula Sharma23 Aug, 2024

Intermediate Goods: The intermediate goods are items businesses use to create final products or services. These goods, also known as producer goods, are essential in the production process, serving as the building blocks for finished goods that are eventually sold to consumers.

In simpler terms, intermediate goods are inputs used to produce the final goods we see in the market. They can either be manufactured by a company to create their own final products or sold to other businesses that use them to produce consumer goods. In this article, we will explore the concept of intermediate goods, their role in Gross Domestic Product (GDP), how to distinguish between intermediate and final goods, and provide examples to clarify the concept for commerce students .

Functioning of Intermediate Goods

Intermediate goods serve an important role in the manufacturing process, which is why they are also known as producer goods. These items are sold between industries to be used in the creation of other products. When intermediate goods are used, they are transformed into different forms or combined with other materials. There are three main ways intermediate goods are utilized:

Production and Use: A company might produce intermediate goods and use them in its own manufacturing process.
Selling to Other Industries: Companies may produce intermediate goods and then sell them to other businesses that use them to create their own products.
Purchasing for Production: Businesses often buy intermediate goods to use in making either a secondary product or the final product.

Intermediate Goods Example

Here, we've mentioned the Intermediate Goods Example for commerce students' reference. Let’s break down the concept of intermediate goods with an example in different stages: Stage 1: Cotton Farming

A cotton farmer grows and sells raw cotton to a textile mill for ₹10,000.
This sale gives the farmer ₹10,000 in value.

Stage 2: Textile Mill

The textile mill processes the cotton into fabric, which is now a secondary intermediate good.
The mill sells the fabric to a garment manufacturer for ₹20,000.
The mill adds ₹10,000 in value (₹20,000 sale - ₹10,000 purchase = ₹10,000).

Stage 3: Garment Manufacturing

The garment manufacturer uses the fabric to make shirts, which are final goods.
The manufacturer sells the shirts to consumers for ₹30,000.
This adds another ₹10,000 in value (₹30,000 sale - ₹20,000 purchase = ₹10,000).

Final Value Calculation The final price of the shirts (₹30,000) is the sum of the value added at each stage:

Cotton Farming: ₹10,000
Textile Mill: ₹10,000
Garment Manufacturing: ₹10,000

This example shows how intermediate goods, like raw cotton and fabric, are essential in creating final products, such as shirts, and how value is added at each stage of production.

Also Read: Commerce Class 12, Syllabus, Subjects, Detailed Concepts

Intermediate Goods and Gross Domestic Product (GDP)

Intermediate goods are not included in the calculation of a country’s Gross Domestic Product (GDP). This is because including them would result in counting their value more than once. Instead, GDP measures the market value of only final goods and services produced within an economy. For example, if a furniture maker buys wood to build a chair, the value of the wood is counted only once, when the finished chair is sold, not when the wood is purchased. This approach, known as the value-added method, ensures that each stage of production is accounted for only once in the final product's value.

Intermediate Goods Vs Consumer & Capital Goods

Intermediate goods, consumer goods, and capital goods serve different purposes based on their use and who buys them. Here’s how they differ: Intermediate Goods: These are used in the production of other products. Whether a good is classified as intermediate depends on its use. For instance, if a company buys paint to use in manufacturing furniture, the paint is an intermediate good. Example: A bakery buys flour to use in making bread. The flour is an intermediate good because it is used in the production of bread. Consumer Goods: These are products bought directly by consumers for personal use. If the same paint is purchased by a homeowner to decorate their house, it is considered a consumer good. Example: A customer buys a loaf of bread from the bakery. Bread is a consumer good because it is purchased for personal consumption. Capital Goods: These are assets used to produce other goods and services. They help in the production process but do not change shape during that process. For example, if a factory buys a machine to help assemble products, that machine is a capital good. Example: The bakery’s oven, which is used to bake the bread, is a capital good. It helps in the production process but remains unchanged in the process of making bread. Understanding these classifications helps clarify the roles of different goods in production and consumption.

Intermediate Goods Vs Final Goods

To properly classify goods, it's important to understand their purpose and how they are used. Here's a detailed explanation of the differences between intermediate goods and final goods: Intermediate Goods: These are products that are used in the manufacture of other items. They are not intended for direct sale to consumers but are essential components in manufacturing. Intermediate goods are transformed or combined with other materials to create a final product. Example: Consider a manufacturer that produces car tyres. These tyres are sold to car manufacturers to be installed on vehicles. The tyres are not sold directly to the final consumer but are used in the production of cars. Final Goods: These products are sold directly to consumers and are ready for use. Final goods are not used to produce other goods; they are purchased for personal consumption or use. Example: On the other hand, a completed car that a consumer buys from a dealership is a final good. The car is ready for use and does not contribute to the production of another product. By understanding these distinctions, students can better grasp how different goods fit into the economic production cycle and their role in the overall market.

Also Read: International Trade – Definition, Importance, Advantages

Understanding intermediate goods is crucial for grasping how value is added throughout the production process. These goods are essential components that contribute to the creation of final products, showing how various industries are interconnected. The key takeaway is that the classification of goods—whether intermediate or final—depends on their usage, which directly impacts economic calculations like GDP. Therefore, Physics Wallah (PW) stands out as the best coaching for Commerce students, offering top-notch education that caters to the specific needs of each learner. With a focus on clarity, practical understanding, and comprehensive coverage of commerce subjects, PW ensures that students are well-prepared for academic success and future career opportunities. Join Now for the PW Commerce Online Course and gain expert knowledge to excel in your studies and future career!

Also Check:
Consumption	New Economic Policy
Demand forecasting	Demand Side Economics
What is Cost?	Types of Planning in Organisation

Intermediate Goods FAQs

What is an example of an intermediate good?

Intermediate goods are products used in the production of final goods. Examples include wheat, which is used to make flour, and steel, which is used in car manufacturing. Other examples are crude oil, which is used to produce gasoline, and sugar, which is used in various food products.

What is the distinction between intermediate and final goods?

Intermediate goods are used by businesses to produce other goods or services and require further processing. In contrast, final goods are ready for direct consumption by the end consumer. Final goods, like a completed bicycle, do not need additional production processes.

Why are intermediate goods not included in GDP?

Intermediate goods are not included in GDP calculations because their value is already accounted for in the final goods they help produce. For instance, plastic used in laptops and steel used in cars are intermediate goods; their value is reflected in the final price of these products.

Is a biscuit an intermediate good?

In production, a biscuit is a final good, not an intermediate one. The flour used to make the biscuit is considered an intermediate good, while the biscuit itself is the final product ready for direct consumption by consumers.

What is meant by a final good?

A final good, also known as a consumer good, is a product that is ready for sale and intended for direct use by consumers to satisfy their needs or wants. Examples include a microwave oven or a bicycle, which do not undergo further processing before use.

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Functioning of Intermediate Goods

Production and Use: A company might produce intermediate goods and use them in its own manufacturing process.
Selling to Other Industries: Companies may produce intermediate goods and then sell them to other businesses that use them to create their own products.
Purchasing for Production: Businesses often buy intermediate goods to use in making either a secondary product or the final product.

Intermediate Goods Example

A cotton farmer grows and sells raw cotton to a textile mill for ₹10,000.
This sale gives the farmer ₹10,000 in value.

Stage 2: Textile Mill

The textile mill processes the cotton into fabric, which is now a secondary intermediate good.
The mill sells the fabric to a garment manufacturer for ₹20,000.
The mill adds ₹10,000 in value (₹20,000 sale - ₹10,000 purchase = ₹10,000).

Stage 3: Garment Manufacturing

The garment manufacturer uses the fabric to make shirts, which are final goods.
The manufacturer sells the shirts to consumers for ₹30,000.
This adds another ₹10,000 in value (₹30,000 sale - ₹20,000 purchase = ₹10,000).

Final Value Calculation The final price of the shirts (₹30,000) is the sum of the value added at each stage:

Cotton Farming: ₹10,000
Textile Mill: ₹10,000
Garment Manufacturing: ₹10,000

This example shows how intermediate goods, like raw cotton and fabric, are essential in creating final products, such as shirts, and how value is added at each stage of production.

Also Read: Commerce Class 12, Syllabus, Subjects, Detailed Concepts

Intermediate Goods and Gross Domestic Product (GDP)

Intermediate Goods Vs Consumer & Capital Goods

Intermediate Goods Vs Final Goods

Also Read: International Trade – Definition, Importance, Advantages

Also Check:
Consumption	New Economic Policy
Demand forecasting	Demand Side Economics
What is Cost?	Types of Planning in Organisation