Intermediate Consumption

Published Mar 22, 2024

Definition of Intermediate Consumption

Intermediate consumption refers to the value of the goods and services consumed as inputs by a process of production, excluding fixed assets whose consumption is registered as consumption of fixed capital. This includes raw materials, services, and other supplies that are transformed or fully used up in the production process to create finished goods or services. It’s a measure of the materials and services directly used up in the making of a product, which contrasts with final consumption, the end-use of goods and services by individuals or entities.

Example

Imagine a bakery that produces bread. To make bread, the bakery requires flour, yeast, salt, and water. These are the raw materials directly involved in the production of bread, which are transformed in the baking process. Additionally, the bakery also needs electricity for the ovens, cleaning services for the shop, and packaging for the bread. These services and supplies are also part of the bakery’s intermediate consumption because they are necessary for the production and sale of the bread but do not appear in the final product itself.

The total intermediate consumption for the bakery in a given period would include the cost of all these goods and services – flour, yeast, salt, water, electricity, cleaning services, and packaging. This does not include the depreciation of the bakery’s ovens, which is recorded separately as a fixed capital consumption.

Why Intermediate Consumption Matters

Intermediate consumption is crucial for understanding the efficiency and productivity of a production process. By analyzing intermediate consumption, businesses can identify areas where costs can be reduced or processes can be optimized to save on raw materials or make better use of services. It’s also essential for national accounting and calculating Gross Domestic Product (GDP) using the production approach, where GDP is calculated by adding up the value added (total output minus intermediate consumption) by all producers in the economy.

Measuring intermediate consumption allows economists and policy-makers to assess the structure and dynamics of an economy or a sector, understanding how different inputs contribute to economic output. It’s fundamental for supply chain analysis, helping to pinpoint vulnerabilities or opportunities for innovation within sectors.

Frequently Asked Questions (FAQ)

How is intermediate consumption different from final consumption?

Intermediate consumption involves the use of goods and services in the production process, leading to the creation of new products or services. These inputs are completely used up, transformed, or significantly altered in production. On the other hand, final consumption refers to the end-use of goods and services by individuals, households, or the government for direct satisfaction, use, or investment purposes without further transformation into other goods or services.

Can intermediate consumption be negative?

Typically, intermediate consumption is a positive value, representing the cost of inputs used in production. However, in exceptional accounting circumstances, there might be adjustments that could theoretically lead to a negative figure. For instance, if a correction needs to be applied due to overestimation of consumption in a previous period or if there are refunds greater than the cost of inputs. Such situations are rare and usually corrected in financial records to reflect accurate consumption.

How do businesses manage intermediate consumption to increase efficiency?

Businesses can manage intermediate consumption by optimizing supply chain management, negotiating better terms with suppliers, implementing waste reduction techniques, and adopting more efficient production technologies. Regularly reviewing and analyzing the components of intermediate consumption can also help identify inefficiencies or unnecessary costs. Investing in research and development (R&D) to find alternative materials or innovative processes can further help in reducing the cost of intermediate consumption, thereby improving the overall efficiency and profitability of the production process.

Understanding and managing intermediate consumption effectively is crucial for businesses aiming to enhance their production processes and for economies seeking to optimize resource use and increase output.