Intermediate Good

An intermediate good is a good that is used as an input in the production of another good, rather than being consumed directly. Intermediate goods are distinguished from final goods, which are consumed, and from capital goods, which are used in production but not used up in a single cycle.

Concept

Intermediate goods are the inputs that are transformed in the production process into other goods. They include raw materials, components, and semi-finished products. Their value is embodied in the value of the final goods that are produced.

The distinction between intermediate and final goods is not intrinsic to the good, since the same good may be intermediate in one use and final in another. The distinction depends on the use to which the good is put.

Measurement

The measurement of intermediate goods is complicated by the problem of double counting. If the value of all goods produced were summed, intermediate goods would be counted multiple times, once at each stage of production. The measurement of output must therefore avoid double counting.

The value added approach avoids double counting by measuring the value added at each stage of production, which is the difference between the value of output and the value of the intermediate inputs. The sum of value added across all stages equals the value of the final output.

The input-output framework, developed by Leontief, provides a systematic account of the flows of intermediate goods among industries. The framework is used to analyse the interdependence of industries and to measure the value added content of trade.

Trade

Intermediate goods account for a large share of international trade, reflecting the fragmentation of production across borders. The goods cross borders multiple times as they are processed at successive stages, which complicates the measurement of trade.

The measurement of trade in value added addresses this problem by attributing the value to the countries that contribute it. The measurement requires input-output data that track the flows across industries and countries.

The importance of intermediate goods in trade has implications for trade policy. Tariffs on intermediate goods raise the cost of production and reduce the competitiveness of downstream industries. The formation of regional trade agreements reflects in part the desire to reduce these costs.

Significance

The distinction between intermediate and final goods matters for the analysis of the economy. It affects the measurement of output, of productivity, and of trade. It affects the analysis of the effects of policy, since a policy that affects the price of an intermediate good affects the cost of the final goods that embody it.

The distinction also matters for the analysis of the structure of production. The length and the complexity of the production chain affect the vulnerability of the economy to disruptions and the scope for specialisation.

Input-Output Analysis

The input-output framework, developed by Wassily Leontief, provides a systematic account of the flows of goods and services among the industries of an economy. The framework records the intermediate inputs used by each industry and the outputs that it produces, and it captures the interdependence of the industries.

The framework is used to analyse the effects of changes in demand on the economy. A change in the demand for the output of one industry affects the demand for the intermediate goods that it uses, and thus the output of the industries that supply them. The multipliers that capture these effects are derived from the input-output table.

The framework has been extended to the international level, with the construction of global input-output tables that record the flows among countries. These tables are used to measure the value added content of trade and to analyse the global value chains.

Value Added and Gross Trade

The distinction between gross trade and value added trade is central to the analysis of the global economy. Gross trade records the full value of the goods that cross borders, including the imported inputs that they embody. Value added trade attributes the value to the countries that contribute it.

The difference between the two is large for countries that are deeply integrated into global value chains. A country that assembles imported components and exports the finished goods has a large gross export figure but a smaller value added figure, since much of the value originates abroad.

The measurement of value added trade has implications for the analysis of trade balances and of the effects of trade on employment. The bilateral balance between two countries may differ substantially depending on the measure used.

The Structure of Production

The length and the complexity of production chains affect the structure of the economy and its vulnerability to shocks. A longer chain involves more stages of production and more transactions, and it is more exposed to disruptions at any stage.

The structure of production also affects the scope for specialisation and for the division of labour. The fragmentation of production allows firms and countries to specialise in particular stages, raising the efficiency of production.

The analysis of the structure of production informs the design of industrial policy and of trade policy, and it is relevant to the assessment of the resilience of the economy.

Summary

Intermediate goods are the inputs that are transformed in production, and their measurement requires the avoidance of double counting. The input-output framework and the analysis of value added trade provide the tools for the analysis of the structure of production and of the global economy.

See also

• Production Economics
• National Accounts
• Global Value Chain