What’s it: Semi-finished goods are processed raw materials not for final consumption but as input for other goods’ production. We also call them intermediate goods. We also call them intermediate goods. An example is aluminum alloy for making cars. Flour for making bread is another example of a semi-finished good.
Semi-finished goods have lower added value than the final product. We cannot use them directly, but the company must process them first to become finished goods.
The difference between intermediate goods, capital goods, and consumer goods
Semi-finished goods are materials or components of the final product. They may come from other raw materials or semi-finished goods. Consumers cannot consume them directly but must be processed first. Neither user nor seller, they are usually businesses. An example is aluminum alloy.
Consumer goods are the final product. Consumers use it to meet their daily needs without having to process it further. The seller is the company, while the buyer is the final consumer. An example is a car.
Capital goods are man-made goods to assist in the production process. They do not form a component or become part of a product. An example is a robot in a car factory. They perform functions such as painting, welding, and assembly line work but are not part of an automobile.
Capital goods transactions occur between businesses. For example, a car maker buys a robot from another company.
Examples of semi-finished goods
The semi-finished goods may come from within the company. For example, suppose a carmaker has a subsidiary that produces metal alloys. The subsidiary then sends it to a car production facility to be used as material for car frames. This is an example of vertical integration.
Meanwhile, several other companies buy from other suppliers, which are not under their ownership. This is a more common practice.
Furthermore, processing the intermediate goods may require a longer production chain. Companies may use semi-finished goods to make other semi-finished goods. For example, the company produces nickel ingots to produce stainless steel. Nickel ingots are intermediate goods with raw materials derived from nickel ore. Likewise, stainless steel is an intermediate item for end products such as automobiles, surgical instruments, and production machines.
Various examples of intermediate goods you can find around you, including:
- Wooden planks for making furniture and furnishings. The raw material for wooden planks is the log.
- Glass for the production of windows and glasses. The raw material for glass is quartz sand.
- Gold and silver for making decorations, home furnishings, and jewelry. The raw materials for both are gold ore and silver ore.
- Crude palm oil for cooking oil production. The raw material is palm fruit.
Semi-finished goods in the calculation of GDP
Gross domestic product (GDP) shows you the monetary value of the final product produced in an economy. In the calculation, we exclude semi-finished goods to avoid double counting. That’s because the final product’s value contains the value of all inputs, including intermediate goods. Thus, if you sum the final value for each intermediate good, GDP will give the wrong value.
Take a simple example to explain it. Assume, GDP consists only of bread products. For its production, it involves the following processes:
- The farmer sells the wheat to the mill for $1,000. Because at the beginning of the value chain, farmers generate an added value of $1,000.
- The factory processes wheat to make flour, which is an intermediate item for the production of bread. The factory sells flour to bread producers for $1,500. Thus, the factory generates an added value of $500 ($1,500– $1,000).
- Bread is the final item and is sold directly to consumers. Bread producers buy flour from factories and use it to make bread. Then, the producer sells the bread to the final consumer for $1,700. Therefore, the added value at this stage is $200 ($1,700–$1,500).
From the example above, the GDP value is equal to $1,700, which is the final product’s monetary value (bread).
If you add up each item’s value (wheat, flour, and bread), it will double count. In this case, you get the figure of $4,200 ($1,000 + $1,500 + $1,700). And, your GDP calculation is wrong.
For example, the final value of the bread is $1,700. It contains a value of $1,500 of flour because, in effect, the bread producer-only adds a value of $200.
To solve this problem, you can use a value-added approach to calculate GDP. In this case, you add up the added value in each production chain, namely wheat for $1,000, flour for $500, and bread for $200. The final result is $1,700 ($1,000 + $500 + $200), which is the same as the final value of the bread.
What to read next
- Goods: Definition, Importance, Types
- Services: Definition, Examples, Characteristics, How to Measure
- Semi-finished Goods: Meaning, Examples, Calculation in GDP
- Value-Added Product: Definition and Brief Explanation
- Durable Goods: Meaning, Characteristics, Examples, And Importance
- Consumer Service: Meaning, Examples, Differences with Consumer Goods