What is the Intermediate Consumption?
Intermediate consumption by non-financial industrial establishments:
Goods and services used fully during the process of production are intermediate consumption. It also includes maintenance and repair, research and development. They are valued at the price purchaser has paid for it. Non-financial firms use various non-durable goods and services as intermediate consumption. In case of industries, intermediate consumption constitutes of domestic good or imported goods. However, the expenditure incurred on them is treated as compensation to employees and not as intermediate consumption.
The logic behind it is that these goods and services are provided for benefits of employees. But expenditure on entertainment, traveling used for promotion purpose is treated as intermediate.
Similarly expenditure on major repairs which lengthens the life of fixed assets are treated as expenditure on fixed capital formation and minor expenditure which doesn’t increases the asset’s life are considered as intermediate consumption.
Intermediate consumption by financial establishments:
Financial establishment banks and intermediaries and entities dealing in pension funds and insurance. Banks earn income either as net interest receipt on loans and advances and from charges of certain services provided to customers. If only these incomes are considered then banking activity will not even cover its cost, therefore services provided by bank for free needs to be imputed.
The intermediate consumption in banks is their current expenditure on factor payments. For insurance, too intermediate consumption amounts to current expenditure exclusive of factor payments.
Intermediate consumption in respect of PGS, PPNSH and DSH:
Their intermediate consumption includes purchases of goods and services on current account less sales of second hand goods, value of goods in kind received as transfers or gifts, durable goods acquired for military purposes and goods and services paid by the government but provided by private suppliers to households. Family dwellings for military servants, defense offices are not considered as intermediate consumption.
On the basis of information of the goods and services and intermediate consumption, GDP can be estimated in two ways:
- As gross value of output occurring from industries, PGS, PPNSH and DSH less consumption and by adding net indirect taxes.
- As approximated basic value plus indirect taxes net of subsidies at the aggregated domestic level less intermediate consumption.