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Intermediate Goods and Final Goods
Intermediate Goods and Final Goods
In the context of determining the National Income in economics, Goods purchased for consumption or for investment are called final Goods. On the other hand, Intermediate goods are goods purchased and used up in production process or resold during the same year.
In economics, all goods which are used as raw material for further production of other goods are treated as intermediate goods, even though it is finished goods for it's manufacturer. When you calculate national income, such goods which are used for resale in the same year are also treated as intermediate goods.
So we can define intermediate goods as "Goods which are used up during the process of production of other goods are called intermediate goods". Cloth purchased for making shirt by a dress making company is an intermediate good. At the same time if it is purchased by an individual for his personal use, it is a final good. So, the use of the commodity determines whether it is finished good or an intermediate good. Coal is a finished good when it is used by a household. But, when it is used by a factory, it is an intermediate good as it helps the production process of other goods.
While determining the national income, we only take the cost of finished goods. If we take the cost of intermediate goods in to account, even though it is a finished good by nature, while determining the national income we will not get the correct figure as there are chances of doubling the cost. So it is important to note that while calculating the national income, we only take the cost of finished goods and not intermediate goods.
When you calculate national income, Final goods are the goods meant for consumption by a consumer or goods meant for investment by a firm or an individual. Or we can say goods which do not undergo any further transformation or changes in the production process are called final goods. Thant means such goods will not undergo any further production process. Once it is sold out, it will be used for consumption and comes out of the active economic flow.
For example sugar can be treated as a finished or final good when a household user purchases it. At the same time, if a baker purchase that sugar for making cake, it can be treated as an intermediate good because it is an ingredient to the cake which is a finished good. In this case sugar undergoes another production process and dissolved in the finished goods.
Now, final goods can be divided in to two categories. They are:
- Consumption Goods
- Capital Goods
Consumption Goods: Goods which are consumed by the ultimate consumers or which meet immediate needs of consumers directly are called consumption goods. Examples of consumption goods are pen, pencil, food, radio, mobile etc. Examples of services rendered for consumption are hotel, barbers, transport services etc. Examples of services rendered to the public or used collectively by the people are parks, street lights, police, courts, schools, mass transport systems like train, bus, metro train etc. Consumption of goods and services plays an important role in the growth of an economy.
Consumption goods can be further categorized into two. They are non-durable and durable goods. Fruits, milk, matches, coal, cigarettes are some examples of Non-durable goods which can be used only once. TV sets, mobile phone, car, fridge etc. are examples of durable consumer goods which can be used repeatedly for a number of months or years.
Capital Goods: Capital goods are goods which are meant for producing other goods but not for meeting immediate needs of the consumer are called capital goods. Machinery, plants, buildings, tools, tractors etc are some examples of capital goods which are durable in character. These goods are produced or purchased for using in the productive process. Generating income is the main objective of these goods. Some of the characteristics of capital goods are:
1. They would not merge or transform into the final goods while producing other goods.
2. While producing other goods, they undergo wear and tear and need replacement or repair over a period of time.
3. They are the backbone of the production process as they aid and enable production to go on continuously.
4. Capital goods increase the production capacity of an economy.
Capital goods plays a vital part in the growth of an economy. Increase of production of capital goods means more production in the coming days. One machine produces 1000 bulbs a day. Instead of one machine if you use two machines, the production will double as two machines can produce 2000 bulbs a day. Three machines can produce 3000 bulbs a day. It means, increase in capital goods increases the production capacity of consumer goods. For the growth of an economy, it is important to invest in capital goods. Capital goods are purchased either for addition of capacity or for replacement of worn out capital goods or for new production units.