What is an Intermediate Good
An intermediate good is a product used to produce a final good or finished product. These goods are sold between industries for resale or the production of other goods. One example of an intermediate good is salt, a product that is directly consumed but also used to manufacture food products.
Gross domestic product (GDP) is a measurement of the market value of final goods. If intermediate goods were included in the calculation, the intermediate goods would be counted twice in the GDP calculation giving an inaccurate value. Therefore, the value-added approach is used when calculating intermediate goods. This approach values every stage of production involved in producing a final good.
BREAKING DOWN Intermediate Good
Consider a farmer who grows, or produces, wheat. In this example, wheat is the intermediate good. The farmer sells his wheat crop to a miller for $100 giving the farmer an added $100 in value. The miller breaks down the wheat crop and uses it to make flour, which is a secondary intermediate good. The miller sells the flour to a baker for $200 and creates $100 in value ($200 sale - $100 purchase = $100). The final good, which is the good sold directly to the consumer, is the bread that the baker makes using the flour. The baker sells all of his bread for a total of $300, adding $100 of value ($300 - $200 = $100). The final price at which the bread is sold is equal to the value that is added at each stage in the production process ($100 + $100 + $100).
How Intermediate Goods Are Used
There are typically three options for the use of intermediate goods. A company may make and use their own intermediate goods. The company may also produce the goods and then sell them, which is a highly common practice between industries. Companies buy intermediate goods for specific use in creating either a secondary intermediate product or in producing the finished good. Inevitably, all intermediate goods are either a component of the final product or are completely reconfigured during the production process.
Other Examples of Intermediate Goods
There are many intermediate goods that can be used for multiple purposes. Examples include steel, which can be used in the construction of a house or the production of cars; wood, used to make flooring and furniture; glass, used in the production of windows and eyeglasses and gold and silver, which can be used to make decorations, housing fixtures and jewelry.