The relationship between operating leverage and financial leverage

We model the relationship between operating and financial leverage. When operating leverage is exogenously specified, financial leverage is a monotonically decreasing function of operating leverage. When financial leverage is exogenously specified, operating leverage is initially increasing and subsequently decreasing in financial leverage. Finally, when both operating and financial leverage are chosen by the firm, they can be positively related, negatively related or unrelated, depending on which underlying parameter is driving the changes. Thus, operating leverage and financial leverage do not always behave as substitutes, as argued in the traditional literature. The relationship is complex, possibly non-monotonic and dependent on the circumstances; empirical tests need to take this reality into account.     

FROM THE CLASSICAL ECONOMISTS TO EMPIRICISTS: A REVIEW OF THE TERMS OF TRADE CONTROVERSY

Contrary to the classical position, the works of Prebisch and Singer in the middle of the last century launched the controversial hypothesis of a long-term decline in the terms of trade of primary products vis-á-vis manufactured goods and a corresponding decline in the terms of trade of developing countries vis-á-vis advanced ones. The present study traces the origin and evolution of the hypothesis and reviews the related statistical debate. It also reviews the theoretical support for the Prebisch–Singer hypothesis. It is an exercise in the history of economic thought to trace how the controversies surrounding the terms of trade have evolved over time, specifically noting that, with the development of the field of econometrics, the central thesis of the argument got lost somewhere in the realm of hi-tech statistical debates.