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Definition of an Intermediate Good:
An intermediate good
is a good or service purchased by a manufacturer to be used as an input in another product.
Intermediate goods are inputs in a product. They are not the final product. Instead they are sold by suppliers to manufacturers for the inclusion in the final product. Examples of intermediate goods are wood in a house, plastic in a toy, metal in a boat, or sugar in candy. The use of a good determines whether the good is a final good or an intermediate good. For example, an apple sold to a consumer is a final good, but an apple sold to a baker and used to make an apple pie is an intermediate good.
Intermediate goods also need to be distinguished from capital goods. A capital good is the machinery, land, or tools used in the production and distribution of a good or service. Unlike intermediate goods, capital goods are not included in the end product. Instead manufacturers use capital goods in the production of the good or service to improve a firm’s productivity, or increase the output per worker. John is a building contractor. His radial saw is a capital good, but the plywood used as flooring in a house he is building is an intermediate good. The house is the final product, the radial saw is a capital good and the plywood is an intermediate good because it is contained in the house.
Services can be intermediate. For example, if a videographer is employed to film a video that is sold, the videographer is offering an intermediate service. The video is the final product and the value of the videographer’s service is included in the price of the video.
Gross domestic product measures the total production in an economy by adding up the value of all the final goods sold. Intermediate goods are excluded from GDP because including them would result in double-counting. The price of the home John built is included in GDP. John may have paid $3,000 for the plywood he used in the home. You can bet that the $3,000 is included in the price of the home. The plywood would be double-counted if it is added to GDP when John purchases it.
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