Chapter-2: Basic Concepts of Macroeconomics
Goods and service purchased for the purpose of final consumption and final investment are final goods. By consumption, we mean purchases for satisfaction of human wants of both durable and non-durable goods and services. By investment, we mean purchases of capital goods (i.e. producer durables) and net addition to stocks.
- Final consumer goods
The goods which are ready to be used be used by the consumers, in an act of consumption are called final consumer goods, e.g., eatable products like milk, bread, etc.
- Final Producer Goods
The goods which are ready to be used by the producers, in the production proses are called final producer goods, e.g., machinery, Expenditure on these goods is also termed as investment expenditure.
The goods which are within the boundary line of production and value is yet to be added to the goods and are not ready for use by their final users are called intermediate goods.
These are goods which are either used as raw-materials for further production of other goods or for resale in the same year.
Durable goods (like trucks, aircrafts, vehicles etc.) purchased by Government for military purposes are included under the category of intermediate goods as they are used to produce defense services and not for sale in the market.
Basis of Classification
It is important to note that a good or a service may be intermediate for one purchaser and final for another purchaser. Take, for example, milk, when purchased by a household, it is a final product, and when purchased by a restaurant, it is an intermediate product. The services of an electrician when purchased by a household, it is a final product, but when purchased by a factory it is an intermediate product. The notable point here is that no good or service is final or intermediate in itself. It all depends on its end use. Thus, the basis of classifying goods into intermediate goods and final goods is the use of product.
Significance: The significance of distinction between final goods and intermediate goods lies in the fact that national income includes only the value of final goods (and not of intermediate goods). It is because that value of intermediate goods is already included in the value of final goods
DIFFERENCE BETWEEN INTERMEDIATE AND FINAL GOODS
|Basis||Intermediate goods||Final goods|
|Meaning||They are those goods which are still within the production boundary, i.e., either value need to be added or are meant for resale.||They are those goods which are out of the production boundary and available for direct consumption by their buyers.|
|Purpose or use||These goods may be resold by the firms to make profits during the accounting year.||These goods are not resold by the firms to make profits during the accounting year.|
|Consumption||These goods are not ready for use by their final users.||These goods are ready for use by their final users.|
|Value addition||Values is yet to be added to these goods.||Value is not to be added to these goods.|
|Example||Steel used in production of cars.||A microwave oven.|
The concept of production boundary is very significant to understand the distinction between intermediate and final goods. The production boundary is an imaginary line around the producing sector of an economy. As long as goods remain within the production boundary, they remain intermediate goods. It is only when a good comes out of this boundary, it becomes a final good. When we say that goods have crossed the boundary it implies that goods are out of the process of production or the process of value addition.
Value is added by the production units only within production boundary. No value is added, the moment a good crosses the production boundary.
Example: The concept of production boundary can be better understood with the help of an example. Suppose a farmer produces wheat worth Rs. 1000. He sells this wheat to the baker who converts this into breads and sells the same to a grocer for Rs. 2000. The grocer sells these breads to consumer for Rs. 2200. Suppose, the intermediate consumption of the farmer is nil. Then value added by the farmer is Rs. 1000 (1000-0). Value added by baker is Rs. 1000 (2000-1000) and by grocer value added is Rs.200 (2200-2000). This is the final stage of value addition. When breads were sold to consumers, they (breads) cross the production boundary. Breads are final goods. No value is added after that.