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Intermediate good

An intermediate good, also known as an intermediate input, is a commodity or service that is purchased by a firm and used in the production process to create another good or service, rather than being sold directly to the final consumer.^[1] These goods are essential components in multi-stage production chains, where they undergo further processing or assembly before becoming part of a final product available for end-use.^[2] Examples include raw materials like lumber used in furniture manufacturing, semi-finished components such as steel coils in automobile production, and services like software development integrated into consumer electronics.^[3] In economic measurement, intermediate goods play a critical role in calculating gross domestic product (GDP), but their value is deliberately excluded from direct GDP totals to prevent double-counting.^[4] Instead, economists employ the value-added approach, which sums only the incremental value contributed at each production stage, ensuring that the full economic output reflects final goods and services without inflating figures from intermediate transactions.^[5] This method is particularly important in modern global economies, where intermediate goods often cross borders multiple times in supply chains, as seen in sectors like manufacturing and electronics.^[6] The significance of intermediate goods extends to broader economic dynamics, including productivity, trade, and business cycles. They enable specialization and efficiency by allowing firms to focus on specific production stages, fostering international trade in components that can account for a substantial portion of global commerce.^[7] Disruptions in intermediate good supplies, such as those from supply chain vulnerabilities, can amplify economic shocks due to their multiplier effects in production networks.^[8] In the United States, for instance, key manufacturing sectors like transportation equipment and chemicals heavily rely on imported intermediate goods to sustain output and competitiveness.^[9]

Fundamentals

Definition

An intermediate good is a product or service used as an input in the production of another good or service, which is either incorporated into the final product or transformed beyond recognition during the production process.^[5] These goods are essential components in multi-stage production processes, distinguishing them from final outputs intended for direct consumption.^[10] The quantitative analysis of intermediate goods in economic theory was advanced during the early 20th century, particularly through the development of input-output models by economist Wassily Leontief in the 1930s and 1940s, building on earlier ideas like Quesnay's Tableau Économique.^[11] Leontief's framework formalized the analysis of inter-industry flows, highlighting how intermediate goods facilitate the interconnected stages of economic production.^[11] This approach provided a quantitative method to trace the flow of inputs across sectors, laying the groundwork for modern understandings of production interdependence.^[12] Firms engage with intermediate goods in various ways, including producing them internally for their own use, manufacturing them for sale to other businesses, or purchasing them from external suppliers to incorporate into their production processes.^[5] Internal production allows for vertical integration, while external transactions support specialization and supply chain efficiency.^[13] Through these mechanisms, intermediate goods contribute to value-added at each production stage.^[5]

Key Characteristics

Intermediate goods are fundamentally characterized by their role in the production process, where they undergo transformation or incorporation into other products, thereby losing their original form and identity. For instance, raw materials such as steel or fabric are altered during manufacturing to become components like car frames or clothing panels, adding value at each stage without serving as standalone items. This transformative nature distinguishes them as essential inputs that facilitate the creation of higher-value outputs, rather than remaining unchanged for resale.^[3]^[5] A core attribute of intermediate goods is their exclusive use in production activities, precluding direct consumption by end-users for personal satisfaction or utility. These goods are procured by businesses solely to support further manufacturing or assembly, ensuring they do not enter the final consumption stream and thus avoiding double-counting in economic metrics like GDP. Unlike final goods, which are designed for immediate consumer use, intermediate goods derive their economic purpose from enabling the output of those end products.^[14]^[15] Intermediate goods exhibit a wide durability spectrum, encompassing both short-lived items that are rapidly consumed, such as chemicals or fuels expended in a single production cycle, and longer-lasting but non-capital elements like semi-finished parts that may endure briefly before full integration. However, this durability does not extend to fixed assets; intermediate goods are not intended for repeated use across multiple production periods as capital investments, but rather are depleted within the current accounting framework. This spectrum allows flexibility in supply chains while maintaining their status as consumable inputs.^[2]^[16] In advanced economies, a significant portion of intermediate inputs increasingly includes services, reflecting the shift toward knowledge- and service-intensive production. According to OECD analysis, in the median G7 economy, just under one-half of market services output serves as intermediate consumption (as of 2015), encompassing activities like design, logistics, and software development that support goods production.^[17] This service component underscores the evolving integration of intangible elements in modern manufacturing chains.

Classifications and Distinctions

Intermediate vs. Final Goods

Intermediate goods and final goods represent distinct categories in economic production and consumption processes. Final goods are those that are ready for direct end-use by consumers or for investment purposes, thereby directly contributing to consumer utility or capital formation without further processing. In contrast, intermediate goods are inputs utilized in the production of other goods, serving as components or raw materials that undergo transformation before reaching the final product stage. This fundamental distinction ensures that economic analysis accurately reflects value creation at each stage of production.^[5]^[18] The classification of a good as intermediate or final hinges primarily on its intended end-use at the point of sale, rather than its physical form or inherent properties. For instance, a product such as flour may qualify as a final good when purchased by households for personal baking and consumption, but it is classified as an intermediate good when acquired by a commercial bakery for incorporation into bread production. This end-use criterion allows the same physical item to shift categories based on the buyer's purpose, emphasizing the role of market intent in economic categorization. Economists and statisticians apply this principle to delineate production chains accurately, preventing misallocation in aggregate measures.^[5]^[18]^[19] A critical rationale for separating intermediate and final goods in economic accounting is to mitigate the risk of double-counting, which would otherwise inflate measures of overall economic activity. If both the value of intermediate goods (such as steel used in car manufacturing) and the resulting final goods (the completed automobile) were included in aggregates like gross domestic product (GDP), the total would erroneously count the embedded value of inputs multiple times along the production chain. To address this, GDP calculations employ the value-added approach, which records only the incremental value at each stage or the full value of final goods, thereby capturing true economic output without duplication. This method is standard in national accounts to provide a reliable gauge of production scale.^[20]^[21]^[5] The differentiation between intermediate and final goods also carries significant policy implications, particularly in taxation and international trade frameworks. In value-added tax (VAT) systems, intermediate goods typically qualify for input tax credits, allowing businesses to deduct the VAT paid on purchases from the VAT collected on sales, ensuring that tax is levied only on the value added at each stage rather than cumulatively along the supply chain. This mechanism prevents tax cascading on inputs, promoting efficient production while shifting the ultimate tax burden to final consumers. Trade policies similarly distinguish these categories, often applying lower tariffs or exemptions to intermediate goods to support global manufacturing efficiency, in contrast to protections or duties on final consumer products.^[22]^[23]^[24]

Intermediate vs. Capital Goods

Intermediate goods and capital goods are both essential inputs in the production process, but they differ fundamentally in terms of durability and expected usage lifecycle. Intermediate goods are defined as non-durable items that are completely used up or transformed during a single accounting period in the creation of other goods or services.^[25] In contrast, capital goods consist of durable assets designed for repeated or continuous use across multiple accounting periods, typically exceeding one year, to facilitate ongoing production activities.^[25] This durability threshold ensures that capital goods, such as machinery or vehicles, retain economic value over time, while intermediate goods, like raw materials or single-use components, do not.^[25] From an economic perspective, capital goods embody fixed investments that build and sustain a firm's production capacity, contributing to the capital stock and subject to gradual depreciation as their value is allocated over their useful life.^[25] Intermediate goods, by comparison, function as current operational inputs that are fully expended in the immediate production cycle without augmenting long-term capacity.^[25] For instance, flour purchased by a bakery represents an intermediate good, as it is consumed entirely in baking bread during that period, whereas the oven used repeatedly over years is a capital good that supports multiple batches.^[26] In accounting treatment, intermediate goods are recorded as inventory and expensed immediately upon sale of the final product as part of the cost of goods sold, in accordance with standards such as IAS 2 Inventories, which requires measurement at the lower of cost or net realizable value. Capital goods, however, are capitalized as assets on the balance sheet under IAS 16 Property, Plant and Equipment and depreciated over their estimated useful life to match costs with the periods they benefit. Similar principles apply under U.S. GAAP, where capital goods qualify for depreciation deductions per IRS guidelines in Publication 946, while intermediate goods flow through inventory accounting without capitalization.^[27] Boundary cases often arise with items like tools or spare parts, where classification hinges on intended use and lifespan. Single-use tools, such as disposable drill bits consumed in one production run, are treated as intermediate goods under IAS 2, as they lack durability beyond the current period.^[28] Reusable equipment, like a durable wrench set expected to last multiple years, is classified as a capital good under IAS 16, subject to capitalization and depreciation.^[28] IRS guidelines provide further clarity through the de minimis safe harbor election, allowing immediate expensing of tangible property costing $2,500 or less per invoice (or $5,000 with an applicable financial statement) instead of capitalization, which can blur lines for low-value reusable items but generally upholds the one-year durability threshold for capital classification. Under IFRS, the distinction emphasizes whether the item is held for sale in the ordinary course (intermediate) or for use in production (capital), with no fixed cost threshold but guided by materiality and useful life assessments.

Economic Significance

Role in Production Chains

Intermediate goods play a central role in multi-stage production processes by serving as inputs that connect successive phases of economic activity. In the input-output framework developed by Wassily Leontief, these goods form essential linkages across sectors, where the output of one industry becomes the intermediate input for another, enabling a systematic analysis of interdependencies in production. This model represents the economy as a network of technical coefficients, illustrating how intermediate goods facilitate the flow of resources from primary production to final assembly, thereby capturing the circular nature of economic interactions without direct consideration of final consumption at each step. Positioned in the middle stages of value chains, intermediate goods promote specialization and operational efficiency by allowing firms to focus on specific production segments rather than entire processes. This positioning supports strategies such as vertical integration, where companies control multiple stages to streamline flows and reduce transaction costs, or outsourcing, which fragments production across specialized suppliers to leverage comparative advantages and lower expenses.^[29] For instance, in automotive manufacturing, steel and components sourced as intermediates enable assemblers to concentrate on final vehicle production, enhancing overall productivity through divided labor. Firms manage inventories of intermediate goods through systems like just-in-time (JIT), which aim to minimize holding costs by synchronizing deliveries closely with production needs, thus reducing waste and capital tied up in stock. However, such lean approaches expose supply chains to vulnerabilities, as demonstrated by the 2021 semiconductor shortage, which disrupted global manufacturing due to delays in these critical intermediates, leading to widespread production halts and highlighting the risks of low inventory buffers in interconnected systems.^[30] This event underscored how reliance on timely intermediate inputs can amplify shocks, prompting some industries to reconsider inventory strategies for greater resilience.^[31] Sectoral interdependence is evident in how intermediate goods bridge primary, secondary, and tertiary activities, fostering a collaborative economic structure. Agriculture supplies raw intermediates like cotton to manufacturing sectors for textile production, which in turn provides finished fabrics or components to service industries such as apparel retail and distribution.^[32] This flow not only drives efficiency through specialized inputs but also amplifies the propagation of innovations and productivity gains across the economy.

Measurement in National Accounts

In national accounts, intermediate goods are measured to ensure they contribute to macroeconomic indicators like gross domestic product (GDP) without leading to overestimation of economic activity. A primary concern is avoiding double-counting, where the value of an intermediate good would be tallied multiple times across production stages. In the expenditure approach to GDP, this is prevented by including only final goods and services in consumption, investment, government spending, and net exports; the value of intermediate goods is instead embedded within the prices of those final outputs, capturing their contribution indirectly without separate enumeration.^[33]^[34] The value-added method addresses this by computing GDP as the aggregate of value added across all production stages, where value added represents the net contribution of each firm or industry after subtracting the cost of intermediate inputs. For each firm i, value added is defined as the value of output P_i minus the cost of intermediate inputs C_i, yielding the formula:

\text{GDP} = \sum_i (P_i - C_i)

This approach ensures that only the incremental value created at each step is counted, eliminating the risk of double-counting inherent in summing total outputs.^[34]^[35] Complementing this, the production approach calculates gross value added (GVA) as total output across all industries minus intermediate consumption, with GDP derived by adjusting GVA for taxes and subsidies on products. Total output includes the market value of all goods and services produced, while intermediate consumption deducts the value of inputs used up in that production, such as raw materials or semi-finished goods. This method provides a sector-by-sector breakdown, highlighting how intermediate goods flow through the economy.^[34]^[33] Data for these measurements are compiled by national statistical offices, such as the U.S. Bureau of Economic Analysis (BEA), which relies on enterprise surveys, administrative records, and input-output tables to track intermediate inputs and outputs. Input-output tables, in particular, matrix-format representations of inter-industry flows, allow for detailed reconciliation of supply and use of goods, ensuring consistency across approaches. Internationally, these practices adhere to the United Nations System of National Accounts (SNA) 2008, which standardizes definitions of intermediate consumption and value added; the 2025 SNA update extends this framework to better incorporate digital flows, such as data as intermediate inputs in software production.^[36]^[34]^[37]

Examples and Applications

Traditional Examples

In the 19th and early 20th centuries, during the period of rapid industrialization particularly in Britain and later in other parts of Europe and North America, intermediate goods played a pivotal role in transforming raw resources into manufactured products, fueling economic expansion through factory-based production systems.^[38] Coal and timber emerged as essential intermediates in early factories, where coal served as a primary fuel for steam engines and iron smelting, while timber provided structural materials for machinery and buildings, enabling the mechanization of industries like textiles and metalworking.^[38] These inputs were integral to the Industrial Revolution's shift from agrarian economies to industrial ones, with coal output in Britain surging from £3.41 million in the 1760s to £37.1 million by the 1850s to support expanding production chains.^[38] Raw materials exemplify traditional intermediate goods, such as cotton, which was imported and processed in textile mills to produce yarn and fabric for clothing and other consumer items.^[5] Iron ore, another key raw material, was smelted into pig iron and then refined into steel, forming the backbone of infrastructure like railways and machinery during the 19th century.^[5] These materials underwent significant transformation, with cotton imports to Britain alone rising from £0.19 million in the 1760s to £31.6 million by the 1850s, underscoring their centrality to export-driven manufacturing.^[38] Components represent semi-processed intermediates that assemble into final products, including steel used in automobile manufacturing to fabricate frames, engines, and chassis.^[26] Flour, derived from wheat milling, serves as a basic component in bread production, where it is mixed with water, yeast, and other additives to create dough for baking.^[5] In the early 20th century, as automotive industries grew, steel components became ubiquitous, with their production reliant on prior iron ore processing to meet demands for durable vehicles.^[3] Chemicals also functioned as vital intermediates, such as salt employed in food processing to preserve meats, cure fish, or enhance flavors in canned goods and baked products.^[26] Chlorine, produced through electrolysis of brine, was a critical chemical input in the manufacture of polyvinyl chloride (PVC) plastics, used for pipes and wiring insulation, with its industrial application expanding in the mid-20th century as a byproduct of sodium hydroxide production.^[39] These chemical intermediates facilitated the diversification of manufacturing, from basic foodstuffs to durable goods, by enabling chemical reactions essential to product quality and scalability.^[40]

Modern and Service-Based Examples

In the modern economy, service-based intermediate goods have become integral to production processes, particularly in knowledge-intensive sectors. Software development services, for instance, serve as key inputs in the creation of mobile applications, where specialized firms provide coding, testing, and integration expertise to enable the final app product for end-users. These services transform raw ideas and requirements into functional software components that are further assembled or deployed. Similarly, legal consultations act as intermediate services during product launches, offering compliance reviews, intellectual property assessments, and regulatory guidance to mitigate risks before market entry, as exemplified in the preparation of new consumer electronics or pharmaceuticals.^[3]^[41]^[42] High-tech components illustrate the evolution of intermediate goods in assembly lines. Semiconductors function as essential intermediates in electronics manufacturing, where raw wafers are processed into chips that are then incorporated into devices like smartphones and computers during final assembly stages. In the realm of artificial intelligence, algorithms developed through specialized computational processes serve as intermediate inputs for training AI models; these optimized routines, often created via machine learning frameworks, enhance model accuracy and efficiency before deployment in applications such as autonomous vehicles or recommendation systems.^[9]^[43] Hybrid cases further demonstrate the blending of services and technology in contemporary production. Data analytics services, provided by third-party firms, act as inputs for digital marketing campaigns, analyzing consumer behavior datasets to inform targeted strategies that drive final advertising outcomes in e-commerce platforms. This integration allows businesses to refine campaigns based on predictive insights, boosting effectiveness without in-house development. Post-2000, the role of such service intermediates has expanded markedly, with IT services' input intensity nearly doubling in high-income OECD countries from 2000 to 2020, and services overall contributing over 50% of value added in OECD exports, underscoring their dominance in production chains.^[44]^[45]

Implications in Contemporary Economy

Global Supply Chains

Intermediate goods play a pivotal role in global supply chains, where they constitute a significant portion of international trade. According to the Organisation for Economic Co-operation and Development (OECD), trade in intermediate inputs accounts for approximately 56% of overall trade flows in goods among developed countries, facilitating the fragmentation of production processes across borders.^[46] This enables offshoring of manufacturing stages, as exemplified by the production of smartphones like the iPhone, which relies on components sourced from over 50 countries, including semiconductors from Taiwan, displays from South Korea, and assembly in China and India.^[47] Such cross-border flows allow firms to leverage comparative advantages in labor, technology, and resources, boosting efficiency and reducing costs in global value chains (GVCs). Supply chain fragmentation, often termed vertical specialization, involves the geographic separation of production stages, with intermediate goods traded multiple times before final assembly. The OECD's Trade in Value-Added (TiVA) database measures this by tracking the domestic and foreign value added in exports, revealing that up to 70% of international trade occurs within GVCs, where intermediates like parts and components are exchanged across countries.^[48] For instance, in the automotive sector, engines produced in one nation may incorporate steel from another and electronics from a third, highlighting how TiVA metrics underscore the interconnectedness of modern production networks and the challenges in attributing value to specific locations. Global supply chains involving intermediate goods have proven vulnerable to disruptions, as seen during the 2020-2022 COVID-19 pandemic, which caused shortages of critical inputs like semiconductors and raw materials, leading to widespread production halts and inflation in downstream goods.^[49] As of November 2025, geopolitical tensions, including U.S.-China frictions and conflicts in the Middle East, continue to pose risks, though a U.S.-China trade truce agreed in late October 2025 has reduced some tariffs (e.g., from 20% to 10% on certain goods) and suspended port fees, while average tariffs remain around 47%.^[50]^[51] This has prompted ongoing discussions on reshoring and nearshoring to enhance resilience. Policy responses, such as the tariffs imposed during the ongoing U.S.-China trade war since 2018, have raised costs for imported intermediates—estimated to reduce U.S. downstream exports and employment by affecting upstream supply chains—thereby disrupting efficiency and encouraging supply chain reconfiguration.^[52]

Digital and Intangible Intermediate Goods

Digital and intangible intermediate goods represent non-physical inputs that embed value into production processes without undergoing physical transformation, such as application programming interfaces (APIs), datasets, and cloud computing services utilized in software development.^[53] These goods facilitate the integration of functionalities across digital platforms; for instance, APIs enable seamless data exchange between applications, while datasets provide raw information for machine learning models, and cloud services offer scalable computational resources that enhance software efficiency.^[54] Unlike tangible intermediates, their value lies in informational or functional contributions that amplify productivity in downstream outputs.^[55] Measuring these goods in national accounts poses significant challenges due to their intangibility, which complicates valuation, depreciation estimation, and distinction from final consumption or capital formation.^[56] Traditional national accounting frameworks often classify expenditures on intangibles like software or data licensing as intermediate consumption rather than investment, leading to underestimation of their economic role.^[57] Recent updates to the System of National Accounts, as outlined in IMF guidelines effective in 2025, aim to better incorporate digital intangibles, including licensed intellectual property, by recommending their treatment as intermediate inputs when used in production chains, thereby improving tracking in macroeconomic statistics.^[58] The economic significance of digital intangibles has grown substantially in advanced economies, reflecting a broader shift toward knowledge-based production.^[59] This expansion, driven by investments in software and data, has boosted productivity in platform economies by enabling scalable innovation and reducing marginal costs of replication.^[60] In tech-intensive industries, such intangibles contribute to higher total factor productivity growth, as firms leverage them to create competitive advantages in global digital markets.^[55] In practice, open-source code serves as a key digital intermediate good, providing reusable components that developers incorporate into proprietary applications, thereby lowering development costs and accelerating innovation without physical alteration.^[61] Similarly, user-generated datasets function as inputs in algorithmic trading systems, where they inform predictive models to generate financial outputs, embedding informational value that enhances decision-making efficiency. These examples illustrate how intangible intermediates foster collaborative ecosystems, with the total economic value of widely used open-source software estimated at approximately $8.8 trillion globally through productivity gains.^[62]

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May 8, 2009 · For example, when we measure new consumer products' contribution to growth, we must consider the consumer surplus that arises from them and the ...
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[PDF] Unlocking Investment in Intangible Assets - Economy and Finance
Both business and national income accounting have traditionally treated outlays on intangibles as intermediate expenditure and not as investment.5 According to ...
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New Standards for Economic Data Aim to Sharpen View of Global ...
Jul 31, 2025 · The updated System of National Accounts better captures digitalization, intangible assets, and global production—helping governments support ...Missing: intermediate | Show results with:intermediate
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[PDF] Intangibles and industry concentration: Supersize me - OECD
This paper finds broad evidence of rising industry concentration, across the majority of countries and sectors over 2002 to 2014, which is strongly related to ...Missing: 2020s | Show results with:2020s
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[PDF] Market Power and Innovation in the Intangible Economy*
The rise of intangible inputs like software reduces marginal costs, raises fixed costs, and gives firms a competitive advantage, deterring entry.
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[PDF] Measuring the Cost of Open Source Software Innovation on GitHub
Open source software (OSS) is software that anyone can study, inspect, modify, and distribute freely under very limited restrictions, generally attribution.