Intermediate Consumption

Intermediate consumption is the value of goods and services used up as inputs during the production of other goods and services. It includes inputs that are transformed or consumed within production, but excludes fixed assets, whose decline in value is recorded separately as consumption of fixed capital.

Scope and classification

Classification depends on how an item is used, not on its physical nature. The same product can be intermediate consumption for one producer and final consumption or capital formation for another.

• Raw materials, fuel, electricity, transport, professional services, and routine repairs used in production generally constitute intermediate inputs.
• Goods purchased for production are recorded as intermediate consumption when they enter the production process; until then, they remain inventories.
• Machinery and buildings used repeatedly over several years are recorded as gross fixed capital formation, not intermediate consumption.

Role in measuring value added

Intermediate consumption is deducted from output because its value is already embodied in the producer's output. Thus, gross value added equals value of output minus intermediate consumption.

• Deducting intermediate consumption prevents double counting when production is aggregated across firms and industries.
• The sum of gross value added across resident producers, plus taxes less subsidies on products, yields GDP at market prices.

Valuation and significance

Intermediate consumption is generally valued at the purchasers' prices prevailing when inputs enter production. Correct estimation is essential because an overestimate lowers measured value added, while an underestimate raises it.