Home > Economics > The difference between a capital good and an intermediate good

The difference between a capital good and an intermediate good

November 14, 2011 Leave a comment Go to comments

Same caveats as before: I really think this can’t be right, so can someone please show me why it is wrong.

Further to the recent theme, I’d like to offer the following ‘definitions’:

Intermediate good: Something used in the production of another good. Deducted from GDP when used up.

Capital good: Something used in the production of another good, but we don’t *really* know how much of it is used up at any point in time. Not deducted from GDP when used up.

Maybe it’s just me, but I don’t see why the fact we don’t *really* know how much of a capital good is used up should make a difference to national income.


Categories: Economics
  1. steveroth
    November 17, 2011 at 10:14 pm

    “we don’t *really* know how much of a capital good is used up ”

    They just estimate it (capital consumption adjustment, consumption of fixed assets) using the best depreciation guesses they can, no? Better or worse than hedonics? You decide.

    It does suggest that other measures besides GDP should be more widely employed in economic analyses. NDP, for instance, subtracting CCA/CFA from GDP.

    You also raise a point that I”ve been wondering about relative to Steve Keen’s definition of AD (GDP +/- aggregate private debt issuance/retirement).

    For AD, aren’t we really interested in the total volume of transactions in a period — not just the transactions on finished goods? Each transaction presumably produces a surplus (or they wouldn’t have happened)…

    I came across this when trying to compare financial-asset transaction volumes to real-economy transaction volumes, wondered if I should include intermediate goods in the real-economy volume, add it to GDP. (FYI, if you don’t include those, the ratio is something like 40 to 1, financial to real.)

  2. November 17, 2011 at 10:50 pm

    I guess the thing with depreciation is that recessions start looking better or worse depending on the method of depreciation you use. Straight line will make recessions look worse than if you use machine hours. That’s a highly contestable issue!

    As for AD, I don’t think it is the total transactions we are interested in. Say a product is assembled in 5 stages by 5 different people in a factory and is sold for $100. Alternatively, there could be 5 companies that employ the 5 different people and ‘transact’ along the way (say the first sells for 20, the second for 40, the third for 60, the fourth for 80 and the final good is sold for 100). Everyone’s pay is the same at the end, and the total is $100, not $300. It makes the answer far too dependent on how we organise the production process.

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