Intermediate Consumption is an important concept of value added method topic in National Income chapter of Macroeconomics class 12 CBSE Board.
In order to Calculate national income by value added method, you must have a command over to recognize intermediate consumption of a production units.
Lets understand this concept in detail.
What is Intermediate Consumption in value added method in simple words?
See, If I explain it in very simple words, intermediate consumption is the expenditure incurred by production units in purchasing the intermediate goods during a given period of time.
Intermediate goods are those goods and services that are purchased by production units from other production units, either for resale (without modification) or used up completely in further production during the same year.
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Define Intermediate consumption and explain it with example
See, we are giving various reference books definition as it is written. we are not changing even a single word for the convenient of students.
Definition of Intermediate consumption as given in Sandeep Garg Book
“Intermediate consumption refers to the expenditure incurred by a production unit on purchasing those goods and services from other production units, which are meant for resale or for using up completely (i.e. further production) during the same year.”
Book, Sandeep Garg
For example:- flour purchased by baker, fruits purchased by fruits seller, milk purchased by sweets shop etc.
Definition of Intermediate consumption as given in T.R Jain Book
“It refers to the value of non-factor inputs (all inputs other than factor inputs of land, labour, capital, and entrepreneurship). Primarily, includes the value of raw material used in the process of production.”
Book, T.R Jain
Components (Elements) of Intermediate Consumption
As such, there are no components of intermediate consumption. What we have to do just recognize a given item as intermediate consumption or not.
Any goods and services bought from outsiders that are used in the production process (directly or indirectly) are included in Intermediate Consumption.
For example:- for a carpenter, wood, nails, adhesive, paint, electricity, insurance, repair of equipment, etc, are all intermediate consumption.
Note:- Purchase of fixed assets is not part of intermediate consumption.
Intermediate Consumption Formula Class 12 Marcroeconomics
We can derive intermediate consumption from given data as below
Intermediate consumption = Value of Output – GDP at MP
Intermediate Consumption = Sales + Change in Stock (Cl stock – Op stock) – GDP at MP
Which of the following constitute intermediate consumption
(i) Expenditure on research and development by Tata.
(ii) Insurance premium paid by a firm to an insurance company.
(iii) Insurance premium paid by households to an insurance company.
(iv) Expenditure on repairs and maintenance of plant and machinery.
(v) Expenditure incurred by a firm on purchase of equipments.
(vi) Advertising expenditure incurred by Airtel on promotion of Its products.
(vii) Business expenses of the employees on tour and entertainment.
Intermediate Consumption Expenditure: (i), (ii), (iv), (vi), (vii);
Final Consumption Expenditure: (iii), (v).
Electricity consumption in the business is the final or intermediate?
It is the intermediate consumption for business as it is used in further production and becomes a part of the cost of final goods within a year.
Electricity consumption for household is the final or intermediate?
It is final consumption for the household. Everything purchased by household is for own consumption.
Does intermediate consumption includes wages?
No, wages and salaries are part of the value addition.
Are single-use producer goods intermediate consumption?
Yes, intermediate consumption is also known as the single use producer goods.
What is Government intermediate consumption?
no, there is no government intermediate consumption.
What is household intermediate consumption?
There is no household intermediate consumption. all expenses are final consumption expenditure.
Is intermediate cost and intermediate consumption same?
Yes, both are same
Does intermediate consumption includes wages?
No, wages is the part of value addition.
Is purchase of machinery intermediate consumption?
No, It is the final expenditure for a production unit.
Is the expenditure on research and development an example of intermediate consumption.
Yes, It is the intermediate consumption for production unit