Intermediate consumption

Intermediate consumption is an economic concept used in national accounts, such as the United Nations System of National Accounts (UNSNA) and the US National Income and Product Accounts (NIPA).

Conceptually, the aggregate "intermediate consumption" is equal to the amount of the difference between gross output (roughly, the total sales value) and net output (gross value added or GDP).

Thus, intermediate consumption is an accounting flow which consists of the total monetary value of goods and services consumed or used up as inputs in production by enterprises, including raw materials and various other operating expenses.

Because this value must be subtracted from Gross Output to arrive at GDP, how it is exactly defined and estimated will importantly affect the size of the GDP estimate.

Intermediate goods or services used in production can be either changed in form (e.g. foodstuffs) or completely used up (e.g. electric power).

Intermediate consumption (unlike fixed assets) is not normally classified in national accounts by type of good or service, because the accounts will show net output by sector of activity. However, sometimes more detail is available in sectoral accounts of income & outlay (e.g. manufacturing).

Exclusions from intermediate consumption

Excluded from intermediate consumption are:

The value of the depreciation of fixed assets.

valuables bought by enterprises such as works of art, precious metals and stones, ornaments and jewellery.

Major renovations, reconstructions, or enlargements of existing fixed assets enhancing their efficiency or capacity, or prolonging their expected working lives.

Military weapons such as rockets, missiles and their warheads which are actually used in fighting, and military machinery and equipment of the same type as that used by civil establishments for non-military purposes.

Collective services provided by the public sector (the provision of transport facilities, security, etc.).

Expenditures on mineral exploration.

Social transfers provided by government to households.

Inclusions in intermediate consumption

Included in intermediate consumption are:

Operating expenses such as the rentals paid on the use of fixed assets leased, and also fees, commissions, royalties, etc., payable under licensing arrangements.

The value of goods or services used as inputs into ancillary activities such as purchasing, sales, marketing, accounting, data processing, transportation, storage, maintenance, security, etc.

The ordinary, regular maintenance and repair of fixed assets used in production.

Expenditures on durable producer goods which are small, inexpensive and used to perform relatively simple ongoing operations.

Expenditures on research and development, staff training, market research and similar activities.

all goods except dwellings acquired by governmental establishments engaged in the production of defence services, including expenditures by the military on weapons of destruction and the equipment needed to deliver them.

Rentals paid on buildings or equipment under an operating lease.

Valuation principles

Conceptually, intermediate goods or services should be valued at purchaser's market prices (including transaction costs and tax), at the point in time when the good or service enters the process of production, not when they were acquired by the producer. In practice, the two times will coincide for inputs of services, but often not for goods, because these can be bought and stored some time as inventories, before they are actually used in production.

Workers' consumption

Some goods and services bought by enterprises do not enter directly into production of output itself, but are consumed by workers (e.g. work clothing, accomodation, meals, transport, washrooms, medical check-ups).

In such cases it is necessary to distinguish whether items are intermediate consumption or, alternatively, a remuneration "in kind" to employees (for example, fringe benefits such as company cars and meal tickets for private use).

In general, when items are used by employees in their own time and at their own discretion for their own use, they are regarded as remuneration in kind, not intermediate consumption. In that case, they are part of the aggregate compensation of employees, and included in gross value added. But if employees have to use them specifically to do their work, they are included in intermediate consumption, and excluded from value-added.

Statistical effects of ownership relations on the boundary between intermediate consumption and value-added

The statistical boundary between intermediate consumption and value added is affected by ownership relations.

If, for example, an enterprise buys services from other enterprises, instead of producing them in-house, its own value added will be reduced, and its intermediate consumption will be increased.

But because in-house production itself has intermediate inputs, the value of the increase in intermediate consumption is likely to be less than the value of services purchased from another enterprise.

Thus, the sizes of total value added and intermediate consumption are affected by the degree to which ancillary activities are either produced in-house by an enterprises, or outsourced from other enterprises within the domestic economy.

Likewise, rentals paid by a business on buildings or equipment under an operating lease are recorded in national accounts as intermediate consumption, and excluded from value-added.

Yet, if an enterprise owns its own buildings, machinery and equipment, most of the costs associated with their use are not recorded under intermediate consumption; depreciation charges are included in gross value added and interest costs, both actual and implicit, are included in net operating surplus. Only the expenses of materials needed for maintenance and repairs to buildings and equipment appear under intermediate consumption.

Consequently, if businesses decide for economic reasons to rent more physical assets, or alternatively buy more physical assets, this can independently affect the size of GDP components and the size of intermediate consumption.

Criticism

One criticism that is made of official national accounts in respect of intermediate consumption concerns the treatment of income from rents, especially business rents.

In UNSNA, a distinction is drawn between property incomes (including tenant rents) and the rentals receivable and payable under operating leases by producing enterprises.

Such rentals payable by lessees to lessors are treated as purchases of "services produced" by the leasing enterprises, and recorded either as intermediate consumption of renting enterprises, or as the final consumption of households or government.

Yet at the same time owners of funds, land or subsoil assets who exclusively rent out these assets are not considered to be themselves engaged in productive activity at all, and therefore excluded from the production account. The assets loaned, rented or leased are regarded as not being produced in this case, and no capital consumption is considered to be incurred in respect of their use. On the other side, having been included in intermediate consumption, the property incomes payable by enterprises that borrow funds or rent land or subsoil assets do not enter into the calculation of their value added, or operating surpluses, at all.

Thus, even although rents must be paid out of the gross revenue of producing enterprises, they are to a large extent excluded from value-added and GDP. This may be consistent from the point of view of the definition of value-added used, but will provide a misleading view of economic activity and gross profit income, if in fact the proportion of property income in the national income increases. According to some estimates, about one-fifth of profit income in the USA nowadays consists of rentier income, but this is difficult to trace in the accounts.

In Marxian economics, rents paid out of the current gross income of producing enterprises are not regarded as intermediate expenditure, but as part of the value product.

External Link

UNSNA "Intermediate consumption" http://unstats.un.org/unsd/sna1993/tocLev8.asp?L1=6&L2=8