Definition
An intermediate good is a product used in the production process that will undergo further transformation before it becomes a final good. These goods are typically used as inputs in the production of other goods such as raw materials or components. Essentially, it’s a good that is sold by one company to another to be used as part of a production process.
Phonetic
The phonetics of the keyword “Intermediate Good” is ɪntərˈmidiːət gʊd.
Key Takeaways
<ol><li>Intermediate goods are goods utilized in the production process to manufacture other goods. They can be either resold or used as components of final products.</li><li>The value of intermediate goods is included in the final product’s price, hence they do not contribute directly to a country’s Gross Domestic Product (GDP) as their contribution is already accounted for in the value of the finished goods.</li><li>Intermediate goods indicate the health of an economy. Increase in demand for intermediate goods can imply a future increase in demand for final goods, which is a positive sign of economic growth and vice versa.</li></ol>
Importance
The term “Intermediate Good” in business/finance is important as it represents a crucial stage in the production process, influencing the cost of finished goods and overall economic productivity. Intermediate goods, such as raw materials or semi-finished products, are those consumed in the manufacturing process to produce the final goods sold to end-users. Understanding the dynamics of intermediate goods can assist in making strategic decisions regarding production processes, cost effectiveness, and supply chain management. For example, a surge in the costs of intermediate goods can drive up the production costs of final goods, affecting a company’s profitability and pricing strategy. Therefore, monitoring the trends, costs, and availability of intermediate goods is vital for businesses to maintain competitive advantage and ensure efficient production.
Explanation
Intermediate goods serve a crucial role in the production process of final goods, acting as the building blocks or components required to create a finished product. They are the materials, parts, or ingredients that have been partially manufactured or processed but are not yet complete, anticipating further use in production. Because they play an essential role in production, they directly influence considerations such as cost, efficiency, and quality of final goods. For instance, in the auto manufacturing industry, engines, tires, windshields, and other parts are considered intermediate goods as they are used in the production of the final product – the car itself. These goods are instrumental in helping companies exploit economies of scale, achieve supply chain efficiencies, and manage production costs effectively. It’s also important to note that the cost of intermediate goods is factored into the price of final goods, meaning that fluctuations in the price or availability of intermediate goods can significantly impact the cost of production and the final price to consumers.
Examples
1. Steel: A company producing cars makes use of steel as an intermediate good since it is bought from steel manufacturers to be used in car production. Similarly, steel in the construction industry is used to build offices, homes, or stores. 2. Cotton: In the textile industry, cotton is an intermediate good. It is grown and sold to clothing manufacturers who then process it into different clothing items.3. Microchips: Electronics companies purchase microchips to use in the production of devices such as computers, smartphones, and tablets. Therefore, microchips are seen as an intermediate good in this case as it is used in the final products.
Frequently Asked Questions(FAQ)
What is an Intermediate Good?
An Intermediate Good refers to a product that is used in the production of a final good or completed product. These goods are sold between industries for resale or for further processing or manufacturing.
Can you provide an example of an Intermediate Good?
Sure, steel is an intermediate good as it’s used in manufacturing cars, construction, and is a key component of many finalized products.
Are Intermediate Goods only used in industrial settings?
No, intermediate goods aren’t only used in industries. They can also be used in the service sector. For example, a hair salon uses shampoo to provide services to its clients. The shampoo is, thus, an intermediate good.
Does the value of Intermediate Goods affect the measurement of GDP?
No, intermediate goods are not counted directly in GDP. This is to avoid double counting, because their value is already embodied in the final goods that they help produce, which are counted in GDP.
Do Intermediate Goods always have to be physical objects?
No, not all Intermediate Goods are physical objects. For instance, software used in creating other products or services is also considered an intermediate good.
How do Intermediate Goods connect to the supply chain?
Intermediate Goods play a crucial role in the supply chain. They are the link between raw materials and finished products. These goods are produced by one company and then sold to another to be either further processed or to be used as is in the final product.
What happens if there’s a shortage or price increase of an Intermediate Good?
If there’s a shortage or price increase of an Intermediate Good, it can impact the production cost of the final goods. It can lead to increased prices for the final product or decreased profit margins for the companies producing the final product.
How does an economy’s production of Intermediate Goods reflect on its economic health?
An increase in the production of Intermediate Goods can be a positive indicator of economic health, as it can suggest an increased demand for final goods. However, this is only one of many factors economists would look at to assess economic health.
Related Finance Terms
- Value Added
- Supply Chain
- Production Process
- Raw Materials
- Economic Output
Sources for More Information
