Intermediate Good

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DEFINITION of 'Intermediate Good'

An intermediate good is a good or service that is used in the eventual production of a final good, or finished product. These goods are sold by industries to one another for the purpose of resale or producing other goods. An example of an intermediate good would be sugar, which is directly consumed but is also used to manufacture food products .

BREAKING DOWN 'Intermediate Good'

Since GDP is a measure of the market value of all final goods, including intermediate goods in any calculations of GDP would result in double counting. Intermediate goods are calculated using the value added approach, which is accomplished by valuing each stage of production towards a final product.

For example, start with a farmer who produces wheat. Wheat is an intermediate good here, and the farmer sells the wheat to a miller for $100, meaning that the farmer added $100 of value. The miller now uses the wheat to make flour, which is a second intermediate good, and sells the flour to a baker for $200. This means that the miller created $100 in value ($200 sale-$100 purchase). Finally, the baker uses the flour and makes bread, which is sold to the consumer and is a final good. The baker sells for $300, and adds $100 of value ($300-$200). Note the $300 final bread price is equal to the value added for each step in the process ($100+$100+$100).

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