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What Are Intermediate Goods? An Extensive Guide & Examples

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3. What Are Intermediate Goods? An Extensive Guide & Examples

If you sell products to anybody, your business uses a wide variety of goods. Some of the most important are intermediate goods. These are often used in the creation of end products or services.

What if you&#;re not exactly sure what counts as an intermediate good? In that case, we&#;ve broken down intermediate goods in detail below. You&#;ll also find a thorough example of what an intermediate good is. This way, you&#;ll be up to identify what intermediate goods your business is dependent on.

Here&#;s What We&#;ll Cover:

Intermediate Goods Explained

How Do Intermediate Goods Work?

How Do Intermediate Goods Affect Your Business?

Examples of Intermediate Goods

Key Takeaways

Intermediate Goods Explained

In a nutshell, intermediate goods are any products that are used to create a finished product or end good. End goods are also called consumer goods. Meanwhile, intermediate goods are also called producer goods or intermediate inputs.

Intermediate goods are distinct from consumer goods and capital goods. Capital goods are products that assist in the creation of other goods but aren&#;t components or ingredients.

Here&#;s an example with the automotive industry:

• A capital good might be a factory machine used to make cars
• Intermediate goods include machine parts for those cars
• The domestic product or consumer goods are the finished cars

As you can imagine, intermediate goods significantly affect the production process and trade costs for all industries. But it&#;s important to know that some intermediate goods can also be finished products. For example, salt is an intermediate good. But salt can be consumed by itself or used in the creation of other foods.

How Do Intermediate Goods Work?

Intermediate goods are vital to production processes. Many industries sell producer goods to one another for resale or so that manufacturers can create other products.

Intermediate goods are used in one of three ways:

• By producers to be used for the production of end products
• By producers to sell to other producers
• By producers to sell to retailers as finished products, like salt

Regardless, all intermediate goods either end up as components in final products or are consumed themselves.

How Do Intermediate Goods Affect Your Business?

If your business produces anything, it needs intermediate goods to create its end products. But your business&#;s intermediate goods trade policies can affect your overall shipping budget.

For example, data from shows that the United States imports most of its intermediate goods. These goods come from countries like China, Canada, and Mexico. As a result, the United States can focus most of its manufacturing budget on producing end goods.

You can apply the same philosophy to your small business and its trading partners. Small business owners that import their intermediate goods can focus on producing finished goods. On the other hand, some small business owners mostly produce intermediate goods. They make most of their profits by selling goods to other businesses. These are called B2B or business-to-business companies.

You must take steps to secure your trade flows of intermediate goods if you import most of them. Imagine that your supplier of intermediate goods suddenly breaks its contract or the supply fails. In that case, you won&#;t be able to make your finished products.

This could spell disaster for your brand image and your profits. Many small businesses, depending on their industry, decide to create their own intermediate goods. Having control over your intermediate goods can stop you from experiencing supply chain strain. This is sometimes called &#;domestic production&#;.

Both strategies &#; importing or making your own intermediate goods &#; can work. But you should understand both strategies and their potential downsides before deciding on one or the other.

Examples of Intermediate Goods

Here&#;s an easy example to help you understand intermediate goods:

• A farmer grows tomatoes as his primary food products
• The farmer sells his crop of tomatoes to a tomato sauce manufacturing company
• The company purchases the tomatoes for $
• The company then makes tomato sauce using the tomatoes. They sell the tomato sauce to a restaurant for $ in a single batch
• The restaurant then sells the tomato sauce in their dishes (such as spaghetti)

At each stage of production, everyone makes a profit. The farmer makes a profit on the initial tomatoes. The tomato sauce manufacturing company makes a profit on the sauce they sell. The restaurant makes a profit on the dishes they create with the tomato sauce.

Throughout it all, the tomatoes were an intermediate good that facilitated the entire transaction.

Key Takeaways

As you can see, intermediate goods are oftentimes more important than end consumer goods. If you haven&#;t already, identify which intermediate goods are necessary for your production processes. This way, you can prioritize securing certain supply chains and ensure your business never faces a supply chain disaster.

Read more helpful articles on our resource guide.

RELATED ARTICLES

What Is an Intermediate Good?

An intermediate good is a product used to produce a final good or finished product&#;also referred to as a consumer good. Intermediate goods&#;like salt&#;can also be finished products, since it is consumed directly by consumers and used by producers to manufacture other food products.

Intermediate goods are sold between industries for resale or the production of other goods. These goods are also called semi-finished products because they are used as inputs to become part of the finished product.

Key Takeaways

• Intermediate goods are products that are used in the production process to make other goods, which are ultimately sold to consumers.
• Intermediate goods are sold industry-to-industry for resale or to produce other products.
• Intermediate goods are typically used directly by a producer, sold to another company to make another intermediary good, or sold to another company to make a finished product.
• When calculating gross domestic product (GDP), economists use the value-added approach with intermediate goods to guarantee that they are not counted twice&#;once when purchased, and once when the final good is sold.

Investopedia / Zoe Hansen

How Intermediate Goods Work

Intermediate goods are vital to the production process, which is why they are also called producer goods. Industries sell these goods to each other for resale or to produce other goods. When they are used in the production process, they are transformed into another state.

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There are typically three options for the use of intermediate goods:

• A producer may make and use their own intermediate goods.
• The producer 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 completely reconfigured during the production process.

Intermediate Goods Example

Consider a farmer who grows wheat. The farmer sells his crop to a miller for $100, giving the farmer $100 in value. The miller breaks down the wheat to make flour, 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 sold directly to the consumer, is the bread. The baker sells all of it for $300, adding another $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).

Services can also be intermediate, as in the case of a photographer&#;the photography is the intermediate service, while the photographs are the final product.

Intermediate Goods vs. Consumer and Capital Goods

Intermediate goods can be used in production, but they can also be consumer goods. How it is classified depends on who buys it.

If a consumer buys a bag of sugar to use at home, it is a consumer good. But if a manufacturer purchases sugar to use during the production of another product, it becomes an intermediate good.

Capital goods, on the other hand, are assets that are used in the production of consumer goods. That means they are purchased to help in the production process. So the baker who bakes the bread in the example above will buy an oven to use in the production process. That oven is considered a capital good, which doesn&#;t transform or change shape, unlike the wheat.

Intermediate Goods and Gross Domestic Product (GDP)

Economists do not factor intermediate goods when they calculate gross domestic product (GDP). GDP is a measurement of the market value of all final goods and services produced in the economy. The reason why these goods are not part of the calculation is that they would be counted twice.

So if a confectioner buys sugar to add it to her candy, it can only be counted once&#;when the candy is sold, rather than when she buys the sugar for production. This is called a value-added approach because it values every stage of production involved in producing a final good.

Special Considerations

There are many intermediate goods that can be used for multiple purposes. Steel is an example of an intermediate good. It can be used in the construction of homes, cars, bridges, planes, and countless other products. Wood is used to make flooring and furniture, glass is used in the production of windows and eyeglasses, and precious metals like gold and silver are used to make decorations, housing fixtures, and jewelry.

What Are Other Names for Intermediate Goods?

Intermediate goods are also called semi-finished products, because they are used as inputs to become part of a finished product, or producer goods, because they are vital to the production process.

What Are Some Examples of Intermediate Goods?

Examples of intermediate goods include flour, precious metals, salt, steel, sugar, wheat, and wood.

What Intermediate Goods Does the United States Export?

Examples of intermediate goods exported by the United States include corn, non-monetary gold, soybeans, and wheat.

The Bottom Line

Intermediate goods are products used in production to make other goods, which are ultimately sold to consumers. Intermediate goods are sold industry-to-industry for resale or to produce other products.

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