Using a Double-Constrained Gravity Model to

Derive Regional Purchase Coefficients1/

By Greg Alward, Doug Olson and Scott Lindall

This paper describes a gravity model to estimate gross trade flows between states. The model
is doubly-constrained so that domestic imports and exports cancel out; that is, when
domestic imports and exports for all states are summed, they are equal for each commodity.
In other words, all sources of supply and demand are accounted for. The results of this model
will be incorporated into IMPLAN software. This updates the current RPC methodology
which was an econometric formulation using MRIO data which was ultimately based on the
1977 Commodity Flow Survey. An econometric based method using the recently released 1993
Commodity Flow Survey was rejected because of the failure of the data to identify the
producers and distributors.

Introduction
Determining the gross commodity import and export flows are of fundamental importance to
successfully deriving regional inter-industry accounts. Estimates of regional purchase
coefficients (RPCs), the rates of gross import purchasing by a commodity user, have long
been the primary focus of research in this area. However, estimating RPCs on the basis of
single-region characteristics do not take into account spatial variables like a regions place in
a trade hierarchy, or the proximity and size of alternate markets. These phenomena are best
modeled using spatial interaction, or gravity, models.
A gravity model is similar to, and named for, Newtons Law of Gravity, whereby, the
attraction between to masses is based on the size of the mass and the distance apart. Usually
shown as:

Gravity = G

(Mass

Mass y )

Dis tan ce x y

1)

Where G is a constant representing the force of gravity.

Spatial interaction systems model the gross flows between nodes, such as the import and
export flows between regional economies. In general terms, the import and export flows
between regions are thought to be proportional to the mass, attractiveness or size of an
economy and inversely proportional to the distance or cost of moving goods and services
between them. Mass variables often are interpreted as gross supply and demand while
distance is frequently equated with the cost of moving goods and services from one location to
another. A simple gravity model for a given commodity would take the form:

Oi D j
Tij = G
d b
ij
where:

Tij

2)

trade flows between regions i and j;

Oi

total commodity supply originating in region i;

Dj

total commodity demand originating used in region j;

d ijb

is the distance function;

G
=
constant of trade (gravity);
b
=
exponent: the larger the exponent the greater the friction to trade.
The trade interaction varies directly with the size of the attraction and inversely with the
distance between them.
If we ignore distance (i.e., b=0 and the denominator of equation 2) becomes 1) trade between
regions i and j only relies on supply satisfying a suitable demand. Supply from region i will
go to meet the demand at region j based on js proportion of all regions demands:

Pij =

Where Pij
D

=
=

Dj

3)

D
is the probability of supply from i going to demand j;
(sum of all Ds)

D
Tij = O j
D

4)

Table 1. An example of demand for 3 region model

Region
Supply of
Demand for
commodity (Oj)
commodity (Dj)
1
100
200
2
600
300
3
300
500
Total
1000
1000

Share of demand
(Dj/D)
0.2
0.3
0.5
1.0

Based on the simple model, as shown in table 1, the probability is that 20% of region 1s will
go to region 1. Since region 1s supply is 100 units, T11 = 20.
We can create a matrix of trade flows based on the information provided in table 1.
Table 2. Matrix of trade flows based on the assumption of no trade friction
Region
1
2
3
1
20
30
50
2
120
180
300
3
60
90
150
Total
200
300
500

Total
100
600
300
1000

However, the attractiveness of a region decreases across distance as a result of time and cost
to deliver the goods. Experience has shown that this decrease is not linear, hence, the
exponent b.

Dj
D
Pij = b
d ij

5)

Dj

Tij = O j bD
d ij

6)

Experience has also shown that equations 5 and 6 overestimates volume of shorter hauls
(Isaard, 1960 and Carroll and Bevis, 1957) so we modify the denominator to account for all
competing sources of demand.

Pij =

Dj
D

b
d ij

7)

Dj
D
j d b
ij

D j

b
d ij

Tij = Oi
Dj
D

j d b

ij

8)

Note from equation 7 that the sum of all probabilities (sum Pijs) is 1.0. Therefore, the sum of
all trade to all regions j is equal to the total supply from region i:
We can simplify equation 8 by recognizing that D cancels out and by setting:

Ai = D j d ij b

9)

We can in this way derive equation 10:

Tij = Oi Ai D j d ijb

10)

IMPLAN Accounts for Gross Commodity Supply and Demand

The IMPLAN social accounting system offers unique opportunities for modeling domestic
region-to-region trade flows with spatial interaction models.
Primary among these

opportunities is accounting consistency: the accounting system is complete and consistent.

Gross supply and demand for all regions add up to supply and demand on a (domestic)
national basis.
This advantage can be exploited as follows. For gross domestic commodity supply,

M r xr + z r = s r

11)

Where: M is the byproducts matrix for region r;

x is the industry output for region r;
z is non-industry (institutional sales) output for region r; and
f is foreign export from region r.
s is the domestic commodity supply for region r.
Similarly, for gross domestic commodity demand,

Ar xr + yr f r = d r

12)

Where: A is the gross absorption matrix for region r;

x is the industry output for region r;
y is gross final commodity demand for region r;
f is foreign export from region r.
d is gross commodity demand for region r; and
When summed over all regions (e.g., states or counties),

s = d
r

13)

That is, all sources of supply and destinations of demand for commodities are accounted for
by the system. Domestic trade flows between regions, of imports and exports are similarly
closed.

A Double-Constrained Gravity Model for Trade Flows

In equation 9, we have a single constrained model in that the sum of all trade flows Tij is
equal to the supply from all region. However, both supplies and demands for all commodities
are known for the system, an interaction model is required to estimate the trade flows
between locations or regions of supply and demand. In general, the form of this model for a
particular commodity is as follows.

Tij = Ai B j Oi D j d ijb
Where:

14)

Tij

trade flows between regions i and j;

Oi

total commodity supply originating in region i;

Dj

total commodity demand originating used in region j;

Ai

( B j D j d ij b ) 1 ;
j

15)

Bj

( Ai Oi d ij b ) 1 ; and

16)

d ij b

is the distance function.

We have introduced a new term Bj. This formulation assures that the two constraints

ij

= Oi

17)

= Dj

18)

and

ij

are satisfied; in other words both the known supplies ( Oi ) and demands ( D j ) can be
correctly obtained from the interaction data.
Notice that the expression for

Ai includes the term B j , while that for B j includes Ai . This

means that they must be computed by iteration. The iteration is accomplished by first setting
Bj = 1 and solving for Ai (eq. 15). The resulting Ai is then plugged into equation 16. The
process is iterated until Ai and Bj no longer change.
Ai and Bj are constants derived through the iteration process and incorporate the inverse
distance relationship between regions i and j, as well as, force the constraints set by
equations 17 and 18 to be true.

Implementation in IMPLAN
Double-constrained trade flows can be accomplished at the state level, and then at the county
level within each state. Or it can be calculated for all ~3200 counties simultaneously. The
advantage of calculating all counties simultaneously lies in the consistency of regions that
cross state boundaries. The disadvantage is the billions of bits of data that has to be handled.
The data exists to mechanize the creation of multi-region models.
Within the IMPLAN data itself the probability values can be stored which allow a user to
modify region data without fouling up trade flow estimates.

Model Validation
We can represent the distance variable (d) as simple centroid distances or, preferably, use a
cost per mile moved function mapped out over transportation networks. The distance
exponent (b) can most simply be set to two or can be adjusted to calibrate the model to
match existing trade flows data.
The most recent and perhaps the most complete data for trade flows is the 1993 Commodity
Flow Survey (Bureau of the Census 1996). How can we use 1993 Commodity Flow Survey to
calculate trade flow equations? What are the drawbacks?
The CFS is a survey of domestic firms to estimate commodity origination and destination
data at the 2-digit commodity data for states and 3-digit commodity data for CTARs
(transportation regions). The Bureau of the Census collected data from commodity producing
and shipping industries as shown in table 3, below.

Table 3. Industry Coverage

SIC/1
Code
Title
10, ex. 108 Metal mining (excluding metal mining services)
12, ex. 124 Coal mining (excluding coal mining services)
14, ex. 148 Mining and of nonmetallic minerals, except fuels (exc nonmetallic minerals
services)
20
Food and kindred products
21
Tobacco products
22
Textile mill products
23
Apparel and other finished products made from fabrics and similar materials
24
Lumber and wood products, except furniture
25
Furniture and fixtures
26
Paper and allied products
27, ex. 279 Printing, publishing, and allied (exc service industries for the printing
trade)
28
Chemicals and allied products
29
Petroleum refining and related industries
30
Rubber and miscellaneous plastics products
31
Leather and leather products
32
Stone, clay, glass, and concrete products
33
Primary metal industries
34
Fabricated metal products, except machinery and transportation equipment
35
Industrial and commercial machinery and computer equipment
36
Electronic and other electrical equipment and, except computer equipment
37
Transportation equipment
38
Measuring, analyzing, and controlling instruments; photographic, medical and
optical goods; watches and clocks
39
Miscellaneous manufacturing industries
50
Wholesale trade--durable goods
51
Wholesale trade--nondurable goods
596
Catalog and mail-order houses
782
Motion picture and video tape distribution
1/ Standard Industrial Classification Manual: 1987. For sale by Superintendent of
Documents, U.S. Government Printing Office, Washington, DC 20402. Stock No. 041-00100314-2.

Given perfect information we could use the data from the CFS to determine how much of local supply was
used to meet local demand for each state. The ratio of local demand met by local supply is called the
Regional Purchase Coefficient (RPC) (Stevens and Trainor, 1980).
Unfortunately the CFS data on the (available on CD) is not perfect.
The first problem is that import data must be derived on a state-to-state basis which forces
over half of the observed values to be non-disclosed. However, we have been told by the
Bureau of Transportation (co-sponsor of CFS) that import data by state by 2-digit commodity
from all domestic sources will be included in the 1997 CFS which is scheduled to be released
about mid-1999.
Second, the CFS does not differentiate shippers who are manufacturers versus shippers who
are resellers i.e., the wholesale sectors and the mail order houses.
This has two effects:
1) manufacturing is shipped and reshipped i.e., there will be double counting;
2) it combines wholesale and retail purchaser prices with manufacturing producer
prices which may alter the relationship we might be able to obtain on net exports
(assuming we could overcome the import non-disclosure problems).
How important are resellers in state-to-state commodity flows?

The imbalance between Exports and Value of shipments by commodities is tremendous. For
example, for the 663 sampling points we have available (i.e., disclosed and non-zero data
available for both Value of Shipments from 1993 Annual Survey of Manufacturers and
outflows from the 1993 CFS for 2-digit SIC by state), there are only 52 cases where Value of
Shipments exceed exports. Five percent of the data points have Value of Shipments
exceeded by outflow by a factor of five!!!

4
3.5
3
2.5
2

Series1

1.5
1
0.5
55

50

46

41

37

33

29

25

21

17

12

06

01

Figure 1 shows the ratio (vertical axis) of export to value of shipment (production) values for
food processing for all states (horizontal axis by FIP codes). A value of greater than one
means that exports exceed production. In all cases, the value is greater than one. All 2-digit
SIC codes reflected this relationship.
Surely, wholesalers and mail order houses cause a tremendous amount of import to re-export
activity. This is exacerbated by the invisible production represented by foreign imports.
The upshot is that validation, in the near term will have to be on a subjective basis
comparing the gravity model results to data that is available in the CFS.
The CFS has a wealth of other data by commodity, including tons, ton-miles, average miles
and value of shipments, by commodity and transportation mode which will greatly improve
the gravity model.

1/ This model is an adaptation of a double-constrained gravity model for trip distribution

described by Lee (1973).

Citations
Carroll, JD and HW Bevis. 1957. Predicting local travel in urban regions. Papers and
proceedings of the Regional Science Association, Vol 3.
Isaard, W. 1960. Methods of Regional Analysis. MIT Press.
Lee, Colin. 1973. Models in Planning. Pergamon Press Ltd., Oxford, England; pp 82.
Stevens, Ben and G. Trainor. 1980. Error generation in regional input-output analysis and
its implications for non-survey models; in S. Pleeter (ed.) Economic Impact Analysis:
Methodology and Applications. Amsterdam: Marinus Nijhoff, pp. 68-84.