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Midsize business

What are intermediate goods and how to account for them?

The goods that drive our consumer marketplace are usually divided into three broad categories: final goods, intermediate goods, and capital goods. 

Final goods, also called consumption goods or finished goods, are items that we buy to use or consume directly. Intermediate goods are things that become part of final goods, including raw materials. Capital goods are fixed inputs that contribute to the production of other goods.

Intermediate goods are often traded between industries as a part of the final product, giving them the alternate names "producer goods" and “semi-finished products.” For manufacturers, these products are the essential ingredients in creating the items they will eventually sell to consumers.

Considering that intermediate goods are such a vital part of the inventory management cycle, it’s good to understand these items and how they differ from other goods.

What are intermediate goods?

Intermediate goods can be the ingredients used in producing goods, like the baker's salt that makes the bread he sells to customers.

Businesses usually sell these goods to other companies to be used to make finished products, or in some cases, to be resold directly to consumers. There are times when intermediate goods are used to make other intermediate goods that are then used to make finished goods.

Because this definition is so broad, a wide array of various items can be called intermediate goods — everything from salt to steel to semiconductors.

Electronics and transportation are heavy consumers of intermediate goods; these two industries trade more intermediate goods than all other sectors combined. These two sectors use very complex intermediate goods in their products, which are produced from other intermediate goods. For example, making a bus or a computer requires a semiconductor, an intermediate good that requires an input of other intermediate goods such as metals and ceramics.

Another example of an intermediate goods are integrated circuits used by the electronics industry. Others are navigational equipment used in transportation, metal and rubber used by the machinery industry, fertilizer used in agriculture, and girders used in construction.

Businesses can use intermediate goods in various ways to create a range of final goods. Steel, for example, is used in constructing homes and cars, building bridges, and making home appliances, among many other things. Wood is used to make flooring, furniture, and buildings.

Intermediate goods that fit both the intermediate and finished goods inventory classification can be used as ingredients for other things or consumed as a final product. The classic example of this is salt, which the baker can use to make bread, or a consumer can sprinkle on their dinner. Another example is sand, which can be used as an intermediate good to make concrete or glass or sold directly to consumers to fill a sandbox.

Intermediate goods vs. finished goods

Intermediate goods are components or materials used in the production of finished goods. Intermediate goods are also referred to as semi-finished products or producer goods, and are typically sold between businesses, such as a producer selling to a manufacturer. While a key part of production, intermediate goods are often unfinished and not ready for the end consumer.

On the other hand, finished goods are also called final goods or consumer goods. They do not need any further processing and are ready for sale. Finished goods can be sold to other businesses or directly to individual customers.

Take, for example, a computer manufacturer. Their intermediate goods may include microchips, motherboards, and hard drives, which they produce in-house or purchase from another company. Their finished good would be the fully assembled computer that’s ready for sale to customers.

Intermediate goods vs. capital goods

Both intermediate and capital goods are used to produce consumer goods. But while intermediate goods are the ingredients of that final product, capital goods are the tools needed to “mix” them. Capital goods are items that help in the production process.

Capital goods don’t get transformed by dissolving or changing shape during the production. For example, when the baker uses the intermediate good salt to create his bread, the salt is transformed into an indistinguishable element of the final loaf. But when he uses the oven, a capital good, the machine doesn’t change while baking the loaf. It gets hot but then eventually cools down again and retains the same shape and functionality it had before.

How do intermediate goods help economic growth?

Since intermediate and capital goods are essential for businesses to produce goods and services, a robust market indicates a vigorous consumer sector. Between 2009 and 2017, imports of all three categories of goods increased in value in the U.S., according to the United States International Trade Commission. Imports of intermediate goods grew 48 percent to $34.7 billion, second to capital goods, which grew 65 percent to $77.6 billion.

These numbers reflect robust trade flows, which can be enabled by savvy trade policy. International economics account for how tariffs can impact trade costs, bog down supply chains, and affect intermediate goods and final goods’ availability and prices.

Intermediate goods and GDP

In macroeconomics, gross domestic product (GDP) measures the total market value of all final goods and services produced within a given economy.

Intermediate goods are not counted toward this total because they are already accounted for in the value of the final good to which they contributed. If you were to count both final and intermediate goods in the country's GDP, you’d end up double-counting the intermediate goods.

When the baker buys the salt for his bread, economists only count it as part of the loaf it is used in, instead of as a product in itself. This method of counting is called a value-added approach.

One way intermediate goods are included in GDP is when they are part of inventory. When intermediate inputs are counted among inventory, they are temporarily “final” goods, and their value can be added to GDP.

Final thoughts

As intermediate goods are in an unfinished state and still need to undergo further processing, it’s important to keep track of each step in the overall production. You can most easily account for all the goods in your warehouse with inventory software that automates your end-to-end inventory management. 

By seeing real-time movements of your own intermediate goods, all the way until the production of final goods, you can better increase efficiencies in your overall operations. 

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