Estimating Trade Flows

OVERVIEW

Within the Social Accounting Matrix (SAM) framework, Trade represents the monetary flows into and out of a region. Payments by Trade represent a flow of money into the region from outside or exports. Payments to Trade represent a flow of money from the region to other regions are known as imports and represent a leakage. In the SAM framework, Trade consists not only of the trade of Commodities (goods and services) but also transfers of money in the forms of after-tax Employee Compensation, Business Transfers, Taxes, Social Benefits, and Capital Transfers.

This article focuses on the data sources and methods used to estimate the Domestic and Foreign Trade of Commodities. The Domestic Trade of Labor Income (commuter flows) are calculated as described in our Estimating Commuter Employee Compensation article. The remainder of the trade entries are used for balancing the SAM.

FOREIGN TRADE DATA

Data on the foreign export and import of shippable Commodities are obtained annually from the U.S. Department of Commerce's Foreign Trade Statistics series. These data are fully disclosed and come with very detailed Harmonized Tariff Schedule (HTS) commodity codes and descriptions. The Census Bureau provides concordance files that map the Harmonized Tariff Schedule (HTS) commodity codes to NAICS codes, which can then be mapped to IMPLAN Commodity codes. These Commodity-specific Trade estimates are controlled to BEA’s NIPA values for total imports of goods and total exports of goods.

Data on the foreign export and import of services come from the latest BEA’s Benchmark I-O Tables, which are published every five years. These values are projected to the current IMPLAN data year using the BEA’s NIPA values for total imports of services and total exports of services.

The controlled national values are then distributed to states and counties on the basis of local commodity production and demand, respectively.

For sub-national regions, foreign imports are assumed to make up the same proportion of the region's demand as for the U.S. Similarly, foreign exports are assumed to make up the same proportion of the region's supply as for the U.S. For example, if the U.S. satisfies 80% of its sugar demands with foreign imports, then each state and county will also satisfy 80% of their sugar demands with foreign imports.

DOMESTIC TRADE DATA

There is no raw data source for county-to-county trade of goods and services on an origin-of-production basis. While some raw data exist on the domestic trade of some shippable Commodities, these data are on an origin-of-movement basis and do not include the domestic trade of services.¹ IMPLAN has developed a Gravity Model to estimate domestic trade flow data.

IMPLAN’s Gravity Model

IMPLAN’s Gravity Model was originally adapted from Newton’s Law of Gravity! This law states that the attraction between two masses is directly related to the size of the masses and inversely related to the distance between them. The gravity model was first suggested in an I-O context in Leontief and Strout (1963). In the last fifty years, the gravity model has been widely used to predict trade flows (Federal Highway Administration, 1977, p. 118; Anderson and van Wincoop, 2003; Anderson, 2011).

In 2005, IMPLAN, in concert with the U.S. Forest Service, developed a sophisticated doubly-constrained (until all supplies go somewhere and all demands are fulfilled) gravity model to estimate trade flows for all IMPLAN Commodities between all counties in the U.S. These Trade Flows show the movement of goods and services between and within counties or user-defined regions made up of counties.

A key aspect of the dataset is that the trade is on an origin-of-production basis, not an origin-of-movement basis. This means that the data set tracks from where a Commodity is produced to where it is consumed; as either an intermediate or final use rather than from where a Commodity begins its export journey.

The main inputs into IMPLAN’s Gravity Model are as follows:

1. Distance: Index of the relative cost of shipping a good via its specific mix of transportation modes between all county-county pairs, from Oak Ridge National Laboratory.
2. Mass:
   • Total demand (intermediate and final) for each Commodity (both goods and services) by each county.
   • Total supply (industrial and institutional) of each Commodity (both goods and services) in each county.
3. Calibrator: Average distance moved by shippable commodity from the Census Bureau’s latest Commodity Flow Survey.

A few notes on errors in estimation:

1. A particular Commodity classification may contain a number of different grades or attributes. A quality difference, real or perceived, can determine whether or not a local consumer is able or willing to purchase a locally produced good or service. Aggregating different products or services into a single category aggravates this problem. Dairy goats and sheep are lumped with pig farmers into Sector 14 "Animal Production", yet neither a cheese maker nor a pork producer will view them as substitutable.
2. Given a choice between two suppliers of a substitutable Commodity, a consumer may still choose the one that is more expensive or of inferior quality for any number of cultural, administrative, or other subjective reasons. A shopper in state A may select organic milk that is imported from state B rather than a less expensive locally produced milk; simultaneously, a shopper in state B, where the organic milk is produced, may select the less expensive traditional milk made in state A. Any number of factors can affect costs and cause inefficiencies observed when haulers of an identical Commodity pass each other going opposite directions on the highway (otherwise known as "cross-hauling").

For more detailed information on the IMPLAN Gravity Model see IMPLAN's Gravity Model and Trade Flow RPCs Report and video.

RELATED ARTICLES

Trade Flow Data in Data Library

¹The origin of movement can differ from the origin of production. For the purposes of economic impact modeling, the origin of production is of prime importance.

Written April 18, 2024