What are Final Goods and Intermediate Goods?

 Goods: In Economics, goods are defined as any physical object, natural or man-made that commands a price in the market.

 

Classification of Goods

Broadly, goods are classified in two ways:

I. Consumption Goods and Capital Goods

II. Final Goods and Intermediate Goods

II. Final Goods and Intermediate Goods

A. Final Goods: Goods and Services purchased or own produced for the purpose of consumption and investment are final goods.

 

By consumption we mean purchases for the satisfaction of human wants of both durable and non-durable goods and services and by investment we mean purchases of durable producer goods and net addition to stock.

 

The essential characteristic of ‘Final Good’ is that these are acquired for own use and not for re-sale. Final Expenditure refers to the expenditure on goods and services meant for final consumption and investment.

Note: It is important to note that no goods or services is either always intermediate or Final goods. A good or service may be intermediate for one purchaser and final for another purchaser. For eg: Purchase of milk. When purchased by a household, it is a final product but when purchased by a hotel, it is an intermediate product.

B. Intermediate Goods: Intermediate Goods refer to those goods and services which are purchased during the year by one production unit from other production units and completely used up or re-sold during the same year.

 

The above definition has two characteristics:

(i) Purchased by one production unit from another production unit

(ii) Used up or resold during the same year.

Note: Not all purchases by a production unit from other production units are intermediate products because not all of them are necessarily or completely used up or re-sold in the process of production during the year.

When traders buy goods and sell them without making nay alteration, it is known as re-selling activity. Eg: All such goods like bread, butter, cold drinks, etc. purchased by the grocer are all intermediate prodcuts. All these purchases are re-sold or added to the closing stock.

 

Exceptions: The case of Defense Goods

Conceptually, only non-durable capital goods are treated as intermediate products. However, in defense services, there are some exceptions:

(i) In defense services, some durable capital goods are treated as intermediate goods. These include weapons of destructions such as missiles, rockets and bombs.

(ii) Equipment needed to deliver these weapons of destructions such as tanks, missiles-carriers and rocket launchers etc. These are treated as raw material needed for producing defense services.

 

Intermediate Consumption

It refers to the expenditure incurred by a production unit on purchasing those goods and services from other production units which are meant for either re-sale or to be completely used up during the same year.

Note: It is important to note that no good or service is either always ‘Intermediate Good’ or always ‘Final Good’. A good or service may be ‘Intermediate’ for one purchaser and ‘Final’ for another purchaser. The following two examples highlight the distinctions: (i) When milk is purchased by a household, it is a Final Good’ but when the same milk is purchased by a hotel, it is an Intermediate product’.   (ii) The services of a self-employed mechanic when purchased by a household is a Final Product but when it is purchased by a factory, it is an intermediate product. Similarity, services of a taxi when purchased by a household, is a final product but when purchased by a production unit, it is an intermediate product.