Intermediate Good

Intermediate Good: Definition and Overview

An intermediate good is a product or service used as an input to produce a final good or service. Intermediate goods may be transformed, combined, or incorporated into a finished product sold to consumers, or further processed into other intermediate goods. The classification depends on how the item is used: the same product can be a consumer good when bought by households and an intermediate good when bought by firms.

How Intermediate Goods Work

Intermediate goods are typically sold business-to-business and are essential to the production process. Common patterns:
* A firm produces and uses its own intermediate inputs.
* A firm produces intermediate goods and sells them to other firms.
* A firm purchases intermediate goods to make either another intermediate or a final product.

Value added at each stage is the difference between a firm’s selling price and its purchase price for intermediate inputs. Summing value added across stages equals the final sale price of the finished good.

Example (wheat → flour → bread):
* Farmer sells wheat to miller for $100 (farmer’s value added = $100).
Miller turns wheat into flour, sells to baker for $200 (miller’s value added = $100).
Baker makes bread and sells to consumers for $300 (baker’s value added = $100).
Final price ($300) equals the sum of value added at each stage ($100 + $100 + $100).

Services can be intermediate inputs too (e.g., professional photography used in a product’s marketing or a design service used in manufacturing).

Intermediate vs Consumer vs Capital Goods

• Consumer goods: Purchased by households for final consumption (e.g., a bag of sugar bought for home use).
• Intermediate goods: Purchased by firms to produce other goods or services (e.g., the same bag of sugar bought by a confectioner).
• Capital goods: Physical assets used in production (machinery, ovens, buildings). Capital goods are not transformed into the final product but enable production.

Classification depends on the buyer’s purpose rather than the physical characteristics of the item.

Intermediate Goods and GDP

Gross Domestic Product (GDP) counts only final goods and services to avoid double counting. Intermediate goods are excluded from GDP calculations because their value is captured indirectly through the final product’s market value. Economists often use the value-added approach, which sums each production stage’s added value to arrive at the final product’s contribution to GDP.

Special Considerations

• Many intermediate goods are highly versatile (e.g., steel used in cars, buildings, bridges).
• Some commodities can be either final or intermediate goods depending on use (salt, sugar, metals).
• Intermediate inputs can be physical materials, components, or services.

Other Names and Examples

Also called semi-finished products or producer goods.

Common examples:
* Flour, sugar, wheat, salt
Steel, wood, glass
Precious metals used in manufacturing
Components such as electronic parts, finished metal shapes
Intermediate services (design, photography, engineering)

Examples of U.S. Intermediate Exports

Examples include crude oil (as an input for refining), non-monetary gold, finished metal shapes, and automotive parts and engines.

Key Takeaways

• Intermediate goods are inputs used to produce other goods or services and are typically sold business-to-business.
• The same item can be a consumer good or an intermediate good depending on who buys it and how it’s used.
• To avoid double counting, GDP measures final goods and services; the value-added approach attributes production value across stages.