Intermediate goods

Intermediate goods (also called producer goods or semi-finished products) are goods used as inputs in the production of other goods, either becoming part of the final product or being transformed beyond recognition in the manufacturing process (Mankiw N.G. 2020, p.497)^[1]. The steel sheet that becomes a car door. The flour that becomes bread. The semiconductor that enables a smartphone. These aren't sold to consumers directly—they're inputs to further production. Understanding this distinction matters enormously for economic measurement, supply chain management, and trade policy.

A single iPhone contains components from over 200 suppliers across dozens of countries. The glass comes from one place, the processor from another, the battery from a third. Each of these intermediate goods adds value as it moves through production stages. Measuring economic output requires careful attention to this reality—count the glass and the phone, and you've counted the glass twice.

Economic definition and characteristics

Intermediate goods possess specific defining features:

Business-to-business transaction. Intermediate goods are sold between businesses, not to final consumers. A tire manufacturer sells to an automaker, not to drivers. The distinction isn't about the product itself but about the transaction^[2].

Further processing required. Intermediate goods undergo additional transformation. Raw cotton becomes yarn becomes fabric becomes clothing. Each stage adds value; each stage's output serves as the next stage's input.

Absorption into final products. The intermediate good either physically becomes part of the final product (like a component) or is consumed in production (like fuel or lubricants).

Time-period dependency. Classification depends on what happens within the accounting period. A retailer's unsold inventory at year-end represents final goods; that same inventory sold to another business for further processing counts as intermediate.

Distinction from final goods

The boundary between intermediate and final goods requires careful consideration:

Consumer purchase vs. business purchase. The same physical item can be either intermediate or final depending on the buyer. Sugar sold to a candy manufacturer is intermediate; sugar sold to a household is final. Tires sold to automakers are intermediate; replacement tires sold to car owners are final^[3].

Dual-use goods. Many products serve both markets. Computers sold to businesses for production activities are intermediate; computers sold to consumers for personal use are final. Coal burned in power plants generates intermediate energy; coal sold to households for heating is final.

Raw materials vs. components. Both qualify as intermediate goods despite different transformation degrees. Iron ore is further from final consumption than assembled engines, but both are intermediate inputs to automobile production.

Role in GDP calculation

Intermediate goods require special treatment in national accounts:

Avoiding double counting

GDP measures final output—the value of goods and services produced for ultimate use. Including intermediate goods would count the same value multiple times:

• A farmer sells wheat to a miller: $100
• The miller sells flour to a baker: $150
• The baker sells bread to consumers: $250

Summing all transactions yields $500, but only $250 of value was created for final consumption. The wheat's value is embedded in the flour; the flour's value is embedded in the bread. GDP counts only the $250 in final sales^[4].

Value-added approach

An alternative calculation sums value added at each stage:

• Farmer adds $100 of value (wheat minus seed, labor, equipment costs)
• Miller adds $50 of value (flour minus wheat cost)
• Baker adds $100 of value (bread minus flour and other inputs)
• Total value added: $250

Both methods yield the same GDP figure, but the value-added approach directly measures each stage's contribution.

Inventory complications

Intermediate goods added to inventory during a period count toward that period's GDP as inventory investment. When used in subsequent periods, they're not counted again—the final good's value captures them. Year-end inventory valuations affect GDP calculations significantly.

Supply chain implications

Intermediate goods dominate modern supply chains:

Fragmentation of production

Manufacturing has fragmented across borders and firms. A single product may cross borders multiple times during production—parts manufactured in one country, assembled in another, finished in a third. Trade in intermediate goods now exceeds trade in final goods^[5].

Specialization patterns

Countries and firms specialize in particular production stages. Taiwan dominates semiconductor fabrication; China excels at assembly; Germany leads in precision machinery. Comparative advantage applies to production stages, not just final products.

Supply chain risk

Dependence on specific intermediate good sources creates vulnerability. The 2011 Japanese earthquake disrupted automotive production worldwide because critical components came from affected regions. COVID-19 revealed similar dependencies—semiconductor shortages halted car and electronics production globally.

Inventory management

Just-in-time systems minimize intermediate goods inventory, reducing carrying costs but increasing supply chain fragility. The efficiency gains from lean inventory must balance against disruption risks.

Categories of intermediate goods

Classification schemes organize the diversity:

By transformation degree

Raw materials. Minimally processed natural resources—crude oil, iron ore, cotton, timber. These undergo substantial transformation before reaching consumers.

Semi-finished goods. Partially processed materials—steel sheets, fabric rolls, chemical compounds. Further processing remains but significant value has been added.

Components. Finished parts ready for assembly—engines, screens, processors. These integrate into final products with minimal additional transformation^[6].

By industry

Agricultural intermediates. Grain for food processing, cotton for textiles, livestock for meat production.

Industrial materials. Metals, chemicals, plastics, glass—the building blocks of manufactured goods.

Energy inputs. Electricity, fuel, steam consumed in production processes.

Services inputs. Business services—logistics, finance, legal, marketing—consumed in producing other goods and services.

Trade in intermediate goods

International trade statistics reveal intermediate goods' importance:

Share of trade. Approximately 60% of global merchandise trade consists of intermediate goods. Supply chains, not just final products, cross borders.

Trade policy implications. Tariffs on intermediate goods raise costs for domestic producers using imported inputs. Protecting one industry may handicap another. Trade agreements increasingly address supply chain integration rather than just final goods access^[7].

Origin determination. Rules of origin determine when goods qualify for preferential trade treatment. Complex supply chains make origin determination challenging—what percentage of value must be domestic?

Trade statistics distortions. Gross trade flows overstate economic significance when goods cross borders multiple times. Value-added trade measures attempt to capture where value is actually created.

Input-output analysis

Economists track intermediate goods flows through input-output tables:

Leontief tables. Named after Nobel laureate Wassily Leontief, these matrices show how each industry uses outputs from every other industry. A column shows an industry's inputs; a row shows where its outputs go.

Multiplier analysis. Input-output models reveal how demand changes ripple through economies. Increased automobile demand raises steel demand, which raises iron ore demand, which affects mining equipment demand—each linkage amplified.

Policy analysis. Governments use input-output analysis to assess policy impacts, understand industrial linkages, and identify strategic sectors^[8].

Contemporary trends

Several developments affect intermediate goods:

Reshoring debates. Supply chain disruptions have prompted reconsideration of global production fragmentation. Some companies bring intermediate goods production closer to final assembly, accepting higher costs for reduced risk.

Services intermediation. Services increasingly constitute intermediate inputs—design, software, logistics. Traditional intermediate goods analysis focused on physical materials; modern economies require broader perspective.

Sustainability concerns. Carbon footprints of intermediate goods affect final product sustainability. Scope 3 emissions accounting traces environmental impacts through supply chains.

Intermediate goods — recommended articles

Supply chain management — Production management — Gross domestic product — International trade

References

• Mankiw N.G. (2020), Principles of Economics, 9th Edition, Cengage Learning.
• World Bank (2023), World Integrated Trade Solution, World Bank Group.
• OECD (2023), Input-Output Tables, OECD Publishing.
• Johnson R.C., Noguera G. (2012), Accounting for Intermediates: Production Sharing and Trade in Value Added, Journal of International Economics, Vol. 86, No. 2.

Footnotes

1. ↑ Mankiw N.G. (2020), Principles of Economics, p.497
2. ↑ World Bank (2023), Trade Statistics Methodology
3. ↑ Mankiw N.G. (2020), Principles of Economics, pp.501-505
4. ↑ OECD (2023), Input-Output Tables Guide, pp.12-23
5. ↑ Johnson R.C., Noguera G. (2012), Accounting for Intermediates, pp.224-236
6. ↑ World Bank (2023), Trade Classification Standards
7. ↑ OECD (2023), Trade in Value Added Statistics
8. ↑ Johnson R.C., Noguera G. (2012), Accounting for Intermediates, pp.237-249

Author: Sławomir Wawak