Question

Briefly explain whether each of the following transactions represents the purchase of a final good. a. The purchase of flour by a bakery b. The purchase of an aircraft carrier by the federal government c. The purchase of French wine by a U.S. consumer d. The purchase of a new airliner by American Airlines

Short answer

a. Not a final good, b. Final good, c. Final good, d. Final good.

Step-by-step solution

Evaluate Transaction a

The purchase of flour by a bakery is not the purchase of a final good. The flour will be used by the bakery to produce other goods (bread, cakes, etc.) that will be sold to consumers. Therefore, flour is an intermediate good in this case.

Evaluate Transaction b

The purchase of an aircraft carrier by the federal government is the purchase of a final good. The aircraft carrier is not going to be used in the production of any other goods, but will be used directly by the government, thus it is a final good.

Evaluate Transaction c

The purchase of French wine by a U.S. consumer is a final good. This is because the wine will be directly consumed by the individual, and not used to make another good or service.

Evaluate Transaction d

The purchase of a new airliner by American Airlines is the purchase of a final good. While the airliner will be used by American Airlines to provide a service (flight transport), it is not an intermediate good that will be transformed in the production process. Therefore, it is considered a final good.

Key concepts

Intermediate Goods

Intermediate goods play a critical role in the economy, acting as the building blocks for the production of final consumer goods. By definition, intermediate goods are products used as inputs in the production of other goods or services. These goods are not finished products; their purpose is to be transformed or incorporated into a different end product.

For example, consider the flour purchased by a bakery from our exercise. The bakery doesn't sell the flour as it is to consumers; instead, it uses the flour to create bread, pastries, or other baked goods. These baked goods would then be considered the final products. The distinguishing factor of intermediate goods is that their value is subsumed within the value of the final goods they help create. They are essential in various industries, such as manufacturing, where raw materials like steel, plastic, or electronic components are used to create finished products like cars, toys, or smartphones.

Final Consumer Goods

Final consumer goods, on the other hand, are products that are purchased for consumption by the end user. Unlike intermediate goods, which are used to produce other goods, final consumer goods are the end result of production and are what consumers ultimately purchase and use. These goods satisfy direct wants or needs of consumers and do not require further processing.

Take, for instance, the French wine purchased by a U.S. consumer mentioned in the exercise. The wine is ready for consumption and will not be utilized to produce a new product. The purchase of final consumer goods is a reflection of a consumer's income, preferences, and tastes. Generally, these goods fall under categories like food, clothing, electronics, and automobiles. As these products are the final stop in the supply chain, their consumption typically marks the end point of the economic production cycle.

Government Purchases

Government purchases form another critical aspect of understanding final goods in economics. When the government buys a product or service, these are also considered final goods. This is because the government is typically the end user of these products and services, which do not enter into further production cycles. An example from our exercise is the federal government's purchase of an aircraft carrier.

The purchase, in this case, does not lead to the production of another good; instead, the aircraft carrier would be used directly by the government for national defense and security. This category of final goods is often extensive and varied, including infrastructure projects, office supplies, vehicles, and defense equipment. Government purchases are a substantial part of a country's gross domestic product (GDP) and play a vital role in the economic analysis.