Question

1. Explain the difference between Final Goods and Intermediate Goods and explain why only final goods are included in Gross Domestic Product. (10 points)

Answer 1

Final goods are those goods and services which are directly consumed by the consumer. These goods are not used for resale. These are also not used as raw material in the production of other commodities. For example, shirt in the store, snacks in the supermarket etc.

Intermediate goods, on the other hand, are those which are used as raw material in the production of other goods and services. These are not directly consumed by the consumers. For example, wood used by carpenter, iron used by a firm etc.

One point to note is that same good can be a final good or intermediate good depending on the stage the good is in. For example, the bread sold at the grocery store is a final good. However, bread at the bakery used for making cakes in not final good. It will be intermediary good.

Only final goods are included in the calculation of gross domestic product to avoid to problem of double counting. This is why intermediate goods are eliminated as their value is reflected in the final goods only.

For example, let us suppose that the bakery used the bread for $19 to make the cake whose value is $30. Now, the value of cake already includes the value of bread used in it. If we add the value of both bread as well as cake, this will inflate the value of gross domestic product and GDP will nlt remain a true indicator. Due to this, we only account for final goods in the calculation of GDP.