Intermediate Goods
What is Intermediate Goods?
Intermediate goods are goods a firm buys and uses up as inputs in producing another good in the same period, so their value is excluded from GDP.
Steel bought by a carmaker and fabric bought by a clothing manufacturer are intermediate goods even though each is a finished product of its own industry. What makes a good intermediate is that the buyer uses it up producing something else in the same period, not that it is unfinished. Their value is left out of GDP because it is already inside the price of the final good, so counting both would double count it.
Intermediate Goods: a worked example
A tire plant produces 250 identical tires in one year. It sells 200 of them to a carmaker at $80 each, which is $16,000, and 50 to drivers as replacements at $120 each, which is $6,000. The carmaker fits four tires to each of 50 cars and sells every car for $22,000, which is $1,100,000. The 200 tires going to the carmaker are intermediate goods, used up in this year's car production, so they are excluded. The 50 replacement tires reach their end user and are final. GDP records $1,100,000 + $6,000 = $1,106,000. Adding the carmaker's tires on top would give $1,122,000, overstating output by exactly the $16,000 already sitting inside the price of the cars.
The mistake students make with intermediate goods
A quick rule forms in students' heads: anything a business buys is intermediate. That sends the carmaker's new stamping press into the excluded pile alongside its steel, and GDP comes out too low. Firms buy two very different things. Steel and paint are consumed making this year's cars, so they are intermediate and excluded. A stamping press keeps producing for years and the carmaker is its end user, so it is a final capital good counted as investment. Ask whether the item is used up in this period's production, not simply whether a firm was the buyer.
Intermediate Goods questions
Why are intermediate goods excluded from GDP?
Excluding them prevents double counting. The price a household pays for a car already contains the tires, steel and glass inside it, so adding those input sales again would count the same production twice. Leaving them out also stops GDP moving for purely organizational reasons: a carmaker that produces its own steel reports fewer input sales than one that buys steel, yet both build the same cars, and counting inputs would make the second economy look larger.
What happens if an intermediate good is not used up in the same year?
Unsold inputs sitting in a warehouse at year end count as inventory investment, part of the I term in GDP. A textile mill that produces $30,000 of fabric and sells $25,000 of it to clothing makers has $5,000 left over, and that $5,000 enters GDP for the year it was produced. When the fabric is used up the following year, inventory investment falls by $5,000, so the value is not counted a second time.
How does the value added method handle intermediate goods?
Value added at each stage equals a firm's sales revenue minus what it paid for intermediate inputs, and summing value added across every firm gives GDP directly. A furniture maker who buys $18,000 of lumber and sells $50,000 of tables adds $32,000. Because each firm subtracts its own input purchases, intermediate goods cancel out of the total automatically, and the answer matches what you get by counting final sales alone.
Related terms
Common comparisons
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