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April 23, 2014 

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AD VALOREM TAX: A tax that is specified as a percentage of value. Sales, income, and property taxes are three of the more popular ad valorem taxes devised by government. The total ad valorem tax paid increases with the value of what's being taxed.

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INTERMEDIATE GOODS:

Goods (and services) that are used as inputs or components in the production of other goods. Intermediate goods are combined into the production of finished products, or what are termed final goods. Unlike final goods, intermediate goods will be further processed before sold as final goods. Because gross domestic product seeks to measure the market value of final goods, and because the value of intermediate goods are included in the value of final goods, market transactions that capture the value of intermediate goods are not included separately in gross domestic product. To do so creates the problem of double counting.
Intermediate goods are an essential part of most production activities. In modern complex economies, like that in the United States, most goods are produced using complex techniques that involve several different stages. Raw materials are extracted at one location, processed at another, transformed into parts at a third, combined with other parts at a fourth, then on and on it goes through additional processing until it ends up as a final good.

For example, sand is processed into silicon chips, which are then combined with only electronic gadgetry to make computers. Trees are processed into two-by-fours, which are combined with nails, plaster, shingles, and paint to make a house. Cotton is woven into fabric, which is combined with thread and stuffing to make Wacky Willy Stuffed Amigos. Computers, houses, and Stuffed Amigos are final goods. Sand, silicon chips, trees, two-by-fours, nails, plaster, shingles, cotton, fabric, thread, and stuffing are intermediate goods.

Some firms perform all production stages internally, from raw material extraction to selling the final goods. As such, they do not purchase intermediate goods. However, many firms perform only parts of the production process. They combine intermediate goods that are purchased from other firms. Intermediate goods are most important when it comes to measuring gross domestic product. The number crunchers at the Department of Commerce who are responsible for calculating GDP begin their estimation process by determining the market value of all market transactions in the economy. However, they exclude transactions that involve intermediate goods because including them means double counting, including the value of a good more than once.

Suppose, for example, that Jonathan McJohnson purchases a new set of All Season MegaTread tires for his vintage 1983 OmniMotors XL GT 9000 Sports Coupe. As a card-carrying member of the household sector, he buys these tires for his personal driving enjoyment. The market value of this purchase is a consumption expenditure and is included in gross domestic product.

However, suppose that OmniMotors also buys a set of All Season MegaTread tires to install on a brand new OmniMotors XL GT 9000 Sports Coupe. OmniMotors buys these tires as an intermediate good in the production of its OmniMotors XL GT 9000 Sports Coupe. This Sports Coupe, complete with All Season MegaTread tires will ultimately be sold to a satisfaction-minded consumer like Maurice Finkelstein. When purchased by Maurice, the total value of the OmniMotors XL GT 9000 Sports Coupe, including tires, is a consumption expenditures and is included in gross domestic product.

Including the value of the All Season MegaTread tires in gross domestic product when purchased as an intermediate good by OmniMotors causes serious double counting. The value of the tires is part of the value of the Sports Coupe, and need not be included separately in gross domestic product.

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Recommended Citation:

INTERMEDIATE GOODS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: April 23, 2014].


Check Out These Related Terms...

     | current production | final goods | in-kind payments | double counting | value added | underground economy |


Or For A Little Background...

     | gross domestic product | gross domestic product, ins and outs | National Income and Product Accounts | macroeconomic sectors | product markets | consumption expenditures | investment expenditures | government purchases | exports | production |


And For Further Study...

     | gross domestic product, welfare | gross domestic product, expenditures | gross domestic product, income | net domestic product | national income | personal income | disposable income | gross national product | real gross domestic product | circular flow | business cycles | Bureau of Economic Analysis |


Related Websites (Will Open in New Window)...

     | Bureau of Economic Analysis |


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