Macroeconomics is a part of economics that focuses on how a general economy, the market, or different systems that operate on a large scale, behaves. Macroeconomics concentrates on phenomena like inflation, price levels, rate of economic growth, national income, gross domestic product (GDP), and changes in unemployment.
“Macroeconomics is that part of economics which studies the overall averages and aggregates of the system”. – KE Boulding
Final Goods
Final goods are those goods that do not require further processing and are ready to use. These goods are also called consumer goods and are manufactured for the purpose of direct use by the end consumer. In a nutshell, final goods are products that are manufactured by a company for consumption by the consumer in the coming time. These goods aim to satisfy the needs or wants of a consumer. Final goods are neither resold nor used for further transformation in production.
Final goods consist of the following:
Goods that are purchased by the local households are meant for final consumption. For example, television, milk, ready-to-eat foods, medicines, etc. It also consists of the goods that are bought by the organizations for investment purposes or the formation of capital.
Final goods can be diversified into the following two broad categories:
Buying habits
Durability
On the basis of buying habits of a consumer, there are four types of goods:
1. Convenience Goods
Convenience goods are those goods that are available and regularly consumed by buyers. For example, milk, bread, pulses, etc.
2. Specialty Goods
Specialty goods are mostly consumed by the upper class of society, as they provide luxury and are expensive. These goods are not a necessity; instead, the purchase is made based on the basis of the user’s desires. Examples of such goods are antique cars, jewelry, etc.
3. Shopping Goods
These types of goods are purchased after thinking a lot about them on the consumer’s part. They are durable and more expensive in comparison to convenience goods. For example refrigerators, televisions, laptops, etc.
4. Unsought Goods
These types of goods are easily available in the market but are rarely purchased by consumers. For example fire extinguishers, snow jackets, etc.
On the basis of the durability of goods, there are three types of goods:
1. Service
Services are intangible, as they cannot be physically touched, but they provide satisfaction to the buyers. They are variable and indivisible. For example, salon services, automobile repair services, etc.
2. Non-Durable
Non-durable goods are goods with small shelf life and are to be consumed as soon as possible. For example, milk, beverages, etc.
3. Durable Goods
Durable goods are goods with a longer shelf life than non-durable goods. For example, cars, equipment, etc.
Intermediate Goods
Intermediate goods are goods used to produce a final good or finished good for the purpose of selling it to the consumers. Intermediate goods like salt can be a finished product, as it is consumed directly by consumers and can be used by producers to produce other food products. Intermediate goods are sold between industries for the resale purpose or for the production of other goods. These goods are also called semi-finished products, as they are used as inputs to manufacture finished products. While calculating GDP, economists use the value-added method for intermediate goods to make sure that they are not counted twice, i.e., once when they are purchased, and once when the final product is sold. There are normally three choices for the use of intermediate goods. A producer may produce and use their own intermediate goods. The producer may also sell them, which is most commonly practiced between industries. Companies purchase intermediate goods for particular use in producing either a secondary intermediate product or in producing the finished product. Usually, all intermediate goods are either a part of the final product or are totally reconfigured during the production process.
Some facts about Intermediate Goods
1. Intermediate goods remain within the production boundary, i.e., these are purchased by one production unit from another production unit. However, every purchase of goods by one production unit from another is not an intermediate purchase of goods. It means that if a good is purchased for investment purposes and not for the purpose of resale, then they are termed as final goods. For example, goods like machinery, etc., are purchased by one production unit from another for the purpose of production. Also, their value is not added to the value of the final good; therefore, these goods are not termed as intermediate goods, but as final goods.
Production Boundary
To understand the difference between intermediate goods and final goods, it is essential to know the concept of production boundary. It is a line around the productive sector, within which as long as the good remains, it is known as an intermediate good, and when the good comes out of this boundary, it is known as a final good.
For Example, A farmer who produces wheat sells his wheat to a miller for ₹100. The miller further uses the wheat to make flour—a secondary intermediate good. The miller sells the flour to a baker for ₹200. The final good, which is sold directly to the buyer, is the bread. The baker sells all of it for ₹300.
The above diagram shows three production units, i.e., Farmer, Miller, and Baker. The thick border around these units is the production boundary, which means that within this limit, wheat and flour are the intermediate goods. However, as the bread is outside the production boundary, it becomes the final good.
2. As the demand for an intermediate good depends upon the demand of the final good in the market, it has a Derived Demand.
3. Usually durable goods are considered final goods, but the durable goods purchased by the Government for the military, such as vehicles, aircraft, trucks, etc., are considered intermediate goods. It is because these goods help in producing defense services and are not for sale in the market.
4. The value of an intermediate good is merged with the value of the final good. For example, if a production unit purchases cotton worth ₹500 and converts it into thread worth ₹800, then the value of the final good (thread) includes the value of the intermediate good (cotton).
5. The goods which are used up in the same year are considered intermediate goods. If a product remains unused for more than one year, it will be treated as a final good. For example, ABC Ltd. purchases 20 tonnes of wood in 2021 for making furniture. Only 12 tonnes of wood was used up in 2021, and the remaining 8 tonnes of wood was carried forward in 2022. Now 12 tonnes of wood will be taken as intermediate goods, and 8 tonnes of wood will be considered as final goods. Also, the value of 8 tonnes of wood will be included in National Income.
Classification of Goods as Intermediate Goods and Final Goods
A good can be classified as an intermediate good and final good based on its use and not on the basis of the good itself. It means that the same product can be a final good as well as an intermediate good, and it depends on its nature of use. In the example of production boundary, wheat is the final product for the farmer and is an intermediate good for the miller. The flour produced by the miller is a final good for him and an intermediate good for the baker. The bread sold by the baker is a final good for him, which is ultimately sold to the consumers outside the production boundary.
Therefore, if the end use of a good is investment or consumption, then it is considered a final good. However, if a good is used for further production or resale in the same year, then it is considered an intermediate good. Hence, the classification of a good as intermediate, and final good is made on the basis of its end use.
Practice Questions:
Identify the goods as intermediate goods and final goods.
1. Ink purchased by a publisher.
2. Plastic used by a pen manufacturer.
3. Bread purchased by households.
4. Laptops purchased by a shopkeeper.
5. Air Conditioners installed in an office.
6. Weaving machine purchased by a cloth manufacturer.
7. White-board markers purchased by a college.
8. Flour used by households.
9. Flour used by a baker for making biscuits.
10. Unsold wood with the shopkeeper at the end of the year.
Answers:
1. It is an intermediate good as ink is used by a publisher for printing books, etc., during the same year.
2. It is an intermediate good as plastic is used by the manufacturer for further production.
3. It is a final good as households are buying bread for final consumption.
4. It is an intermediate good as these are purchased for resale.
5. It is a final product as it is purchased by the office for final consumption.
6. It is a final product as it is purchased for investment.
7. These are intermediate goods as they are to be used by the professors, etc., during the same year.
8. It is a final product as it is used for final consumption.
9. It is an intermediate product as it is used by the baker for further production.
10. It is a final good as the unsold wood is an investment for the shopkeeper.
Only Final Goods are included in the National Income
Intermediate goods are not included in the national income of an economy as they are already included in the final good. If the value of intermediate goods is also added to determine the national income, then it will lead to double counting. In the example of production boundary, out of wheat, flour, and bread, only the value of bread is included in the national income of an economy as it already includes the value of intermediate goods (wheat and flour).
Final Goods V/s Intermediate Goods
Comprehensive Example of Intermediate Goods and Final Goods
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