REPLY

• Date: 01 March 1976
• DOI: http://doi.org/10.1111/j.1540-6261.1976.tb03210.x
• Author: Sidney R. Finkel,Donald L. Tuttle
• Published date: 01 March 1976

THE JOURNAL OF FINANCE - VOL. XXXI, NO. I * MARCH 1976

REPLY

SIDNEY R. FINKEL AND DONALD L. TuTTLE*

OUR ARTICLE, "Determinants of the Aggregate Profits Margin," [1] was an exten-

sion of a simple linear regression estimate of the aggregate profit margin, as stated

in Latane-Tuttle [2]. That equation used capacity utilization as the explanatory

variable. It is recognized that simple linear regression is not satisfactory, hence the

logical step of a multiple linear stepwise regression to test the ability of additional

explanatory variables deduced from standard theory.

The Finkel-Tuttle results found that in addition to the capacity utilization

variable, the trade surplus, GNP deflator and unit labor cost variables were

significant in explaining variation in the profit margin. H. Peter Gray's complaint

about the Finkel-Tuttle results is with the trade surplus variable. He argues that

one should not expect the sign of the trade surplus variable to be negative.

To examine the effect of the trade surplus variable one must look at both exports

and imports. The case for exports is clear. They compete in a world market far

more competitive than national markets; and other things equal, transportation

costs should result in lower margins. Gray accepts our citation of lower income

elasticities saying "This trend, unless offset by requisite changes in price levels or

exchange rates, will have reduced the competitiveness of U.S. industry..."

Strangely, Gray then makes the statement that "These data do not show why a

trade surplus should be correlated with lower aggregate profit margins..." when

that is exactly what the data does show whether Gray's results or ours are

employed!'

We admit the case is less clear with respect to imports. The effect clearly rests

upon the nature of imported goods and services and whether or not they are

substitutes for, or complements with, U.S. domestic production. Certainly a sig-

nificantly greater examination of import composition than Gray has made must be

done before the Finkel-Tuttle results may be rejected.

The purpose of the Finkel-Tuttle research was to conduct an initial inquiry into

the determinants of an aggregate profit margin. We recognize that additional work

using multi-equation models and simultaneous systems is necessary to fully deter-

mine the effects of such variables as the trade surplus. We hope that future students

of the subject will seek to expand knowledge in that direction.2

* GTE Data Services and Indiana University, respectively.

' We regret not being able to provide Gray with the data used in our study. Our study used variables

for which definitions were, in our view, standard in the literature. However, it appears that whatever the

definition used by Gray for the trade surplus variable, "virtually identical results (i.e., negative signs on

the regression coefficient) were obtained..."

2 See, for example, [3] and [4]. 167