Gross domestic product seeks to measure the total market value of FINAL GOODS AND SERVICES produced by the economy in a given period. This is the end result of the production process. These are the goods and services that are produced to address the scarcity problem, either directly as consumption or indirectly as productive capital.
The End ProductFinal goods and services are the end result of the production process. The contrast to final goods is intermediate goods. Intermediate goods are the inputs or components used in the production of other goods. They will be further processed before sold as final goods. A Hot Mamma Fudge Bananarama Ice Cream Sundae, for example, is a final good. It is produced for the expressed purpose of providing a tasty treat to snack hungry consumers.
In contrast, the ice cream purchased by the Hot Mamma Fudge Bananarama Ice Cream Shoppe, which will be used to produce a Hot Mamma Fudge Bananarama Ice Cream Sundae, is an intermediate good. So too is the Hot Mamma Fudge that is glopped generously atop the ice cream. The nut sprinkles, whipped cream, and maraschino cherry are also intermediate goods when purchased by the Hot Mamma Fudge Bananarama Ice Cream Shoppe.
In each case, the cost of acquiring these intermediate goods are included in the selling price of the final good.
ConsumptionThe most prevalent type of final good is that purchased by the household sector to satisfy wants and needs. These are termed consumption goods and expenditures on these goods are consumption expenditures.
The ultimate or intended purpose of these final goods is to provide satisfaction. Alicia Hyfield's consumption expenditure on a Super Deluxe TexMex Gargantuan Taco from Waldo's TexMex Taco World is designed to acquire a final good to satisfy her lunch time hunger need. Jonathan McJohnson's purchase of a candy apply red OmniMotors XL GT 9000 Sports Coupe satisfies his need for transportation (and probably a few psychological wants and needs related to impressing other people).
In both cases, humans are the ultimate user. In neither case is the good purchased as an input in the production of another good. This story would be different if Alicia was a taco vendor at the Shady Valley Primadonnas baseball stadium or if Jonathan owned a car-customizing business.
Suppose, for example, that Alicia buys a bunch of Super Deluxe TexMex Gargantuan Tacos from Waldo's TexMex Taco World with the intention of reselling them to taco-hungry fans watching the Shady Valley Primadonnas play baseball on a sunny summer afternoon. In this case, these tacos are NOT final goods when purchased from Waldo's TexMex Taco World. They ARE final goods, however, when Alicia sells them to taco-hungry baseball fans.
Using similar reasoning, Jonathan's purchase of an OmniMotors XL GT 9000 Sports Coupe is an intermediate good, NOT a final good, if this car is an input of his car-customizing business. Suppose Jonathan's car-customizing business buys XL GT 9000 Sports Coupe, adds racing strips, decorative designs, state-of-the-art stereo systems, and shag carpeting, then resells these cars to image conscious consumers. In this case, the cars are NOT final goods when purchased as inputs into the car-customizing business. They ARE final goods, however, when Jonathan sells them to image-conscious drivers, the ultimate buyer.
InvestmentAnother important type of final goods involves investment expenditures on capital goods that are used as factors in the production of other goods. The ultimate or intended purpose of these final goods is to produce other goods. Capital goods ARE final goods in that they are NOT purchased by a business as an intermediate good for further processing and resale.
Suppose, for example, that The Wacky Willy Company (makers of Wacky Willy Stuffed Amigos--those adorable, cuddly stuffed scorpions, tarantulas, and armadillos) buys a new sewing machine.
The Wacky Willy Company uses this sewing machine as a capital good to manufacture Stuffed Amigos. It does NOT buy the sewing machine as an intermediate good with the intention of reselling it. The Wacky Willing Company is NOT in the business of selling sewing machines. It is in the business of selling Stuffed Amigos. In the same way that Alicia buys a Super Deluxe TexMex Gargantuan Taco because she NEEDS food, The Wacky Willy Company buys a sewing machine because it NEEDS a sewing machine to make Stuffed Amigos.
By comparison, the fabric, thread, and stuffing used to make Stuffed Amigos are intermediate goods. These items are purchased with the intention of reselling them, after a bit of transformation, as Stuffed Amigos. Intermediate goods leave the factory AS the product, capital goods are used over and over again in the production process.
Government PurchasesA third type of final good is that purchased by the government sector. Government purchases are expenditures made by the government sector on the goods and services that it uses when performing government functions. Government purchases can be for goods comparable to consumption goods purchased by the household sector and used to satisfy wants and needs. Or it can be for capital goods that are more like business investment expenditures that are then used to produce other goods.
Two examples of government purchases of the consumption variety are school lunches and Congressional trips. These government purchases are expenditures for goods that are very similar, if not identical, to household consumption expenditures. School lunches satisfy hunger needs, just like Alicia's purchase of a Super Deluxe TexMex Gargantuan Taco. Congressional trips, especially to tropical resorts in January, satisfy transportation needs and probably a few entertainment/vacation needs, similar to Jonathan driving his OmniMotors XL GT 9000 Sports Coupe to the stadium to watch Shady Valley Primadonnas play baseball.
Examples of government purchases of the capital investment variety include the city of Shady Valley buying a garbage truck or the U.S. Department of Commerce buying a computer. In each case the government purchases a good that assists the provision of government activity. The garbage truck helps Shady Valley provide trash collection services to residents. If trash collection is operated by a private business (which it is in many cities) then the purchase of a garbage truck by the business is capital investment. The computer helps the Department of Commerce process the calculation of gross domestic product and related measures. If this computer is purchased by the Shady Valley Gazette-Tribune-Journal to assist in the daily publication of the local newspaper, then it is clearly capital investment.
While many government purchases are clearly final goods (either consumption or capital), other government expenditures are somewhat murky. That is, the line between intermediate and final goods is unclear. For example, are the millions of reams of paper purchased by government a final good or an intermediate good? Paper purchased by the Shady Valley Gazette-Tribune-Journal is an intermediate good. Is paper purchased by the Department of Commerce also an intermediate good?
In large part because government generally does not sell its production through markets, all government expenditures are considered purchases of final goods. The exception (a rather large exception) is transfer payments, such as Social Security, welfare, and unemployment compensation, in which the "expenditure" is essentially a gift. However, any purchase by government of a good or service is considered the purchase of a final good, even though some purchases are clearly for intermediate goods that will be processed further. In other words, government purchases include expenditures on concrete, steel reinforcing bars, and asphalt that are clearly intermediate goods in the production of a street, but they are officially categorized as final goods.
ExportsThe fourth type of final goods is exports to the foreign sector. Exports are goods and services produced by the domestic economy and purchased by the foreign sector. The distinguishing feature of exports is simply that they are purchased by someone beyond the political boundaries of the economy. This could include consumers, businesses, or governments. Anything and everything discussed about final goods purchased by the domestic household, business, and foreign sectors also apply to the foreign sector.
Should a citizen of France by a Super Deluxe TexMex Gargantuan Taco, then an export of a final good results. Should a foreign company that produces stuffed animals purchase a domestically-produced sewing machine to be used in their production, then an export of a final good results. Should the government of Chile buy a domestically-produced garbage truck, then an export of a final good results.
FINAL GOODS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: June 18, 2018].