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If a brewer wants to make beer, they will need barley, hops, yeast and water. They will also need heat and light to run the brewery. These things which are used up during the production process are called the Intermediate Consumption of the brewer.

Intermediate Consumption can be goods or services. As we might expect, producers of goods have more physical inputs than producers of services. For service providers, most of their Intermediate Consumption is other services. For example, a hotel will spend money on laundry, advertising, commissions to booking agents, heat and light, and waste disposal.

Intermediate Consumption includes bank charges, including indirectly measured charges on loans (see FISIM), insurance costs, accounting services, and rent of buildings and equipment (but not rent of land or natural resources, which are Property Income).

As all these examples show, the Output of one company is often the Intermediate Consumption of another.

Consumption is only Intermediate if it is used to produce something else. Costs of services that are directly satisfying final needs or wants are not Intermediate Consumption: they are Final Consumption Expenditure of Government, Households or Non-Profits.

Not all costs to a producer are Intermediate Consumption. Payment to workers is Compensation of Employees. Buying assets that are used for over a year is a part of Capital Formation or capital investment. The cost of wear and tear on those long-term assets used in production is Consumption of Fixed Capital, or depreciation. Interest paid on loans is a separate item called Investment Income.

If a company does not use up the goods or alter them before selling them on, then those goods are not part of Intermediate Consumption. These items, known as 'purchases for direct resale' or 'goods for resale' are excluded from both Output and Intermediate Consumption in National Accounts, even though they may be the biggest outlay for some sectors like wholesalers or retailers. 

When Intermediate Consumption is deducted from total Output the result is Gross Value Added.

Output, Intermediate Consumption and GVA at Constant Price

Read next: Gross Value Added

A-Z of National Accounts

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