APPENDIX I

RELATIVE EFFECTS OF CHANGES IN GROSS EARNINGS
AND IN TOTAL EXPENSE RATIOS ON CHANGES
IN RATIOS OF NET EARNINGS, MEMBER
BANKS, BOSTON FEDERAL RESERVE
DISTRICT, 1924-1925

IT was shown in the analysis in Chapter XVII that gross earnings,
 total expense and net earnings? regress to type—the type
being their respective averages. That is, if they are high in one
year, they tend to be lower the following year. Conversely, if
they are low in any year, they tend to be higher the following
year. It was also shown in the same chapter that gross earnings
generally predominate over total expense in determining the net
earnings of member banks within the Boston district. The purpose
 of this note is to present an analysis, the results of which give
quantitative expressions to the relative influences of gross earnings
 and of total expense on the net earnings of these institutions.
For the purpose stated, two types of linear equations are used.
These are as follows:
Ki+E AT— AN=v..

- (1)

K:+E,AG— AN=yp. .

and

-

in which

— AN is the decrease in the ratio of net earnings to earning assets
from 1924 to 1925, in units of o.1 point;
+ AT is the increase in the ratio of total expense to earning assets
from 1924 to 1923, in units of o.1 point;
+ AG is the increase in the ratio of gross earnings to earning assets
from 1924 to 1925, in units of o.1 point;
+X, is a constant representing the average amount of increase in
1 Prepared, for the most part, by Mr. J. A. Folse, Research Assistant, Bureau of
Business Research, Northwestern University.
2 Throughout this note it is understood that in the use of these terms unqualified,
their respective ratios to earning assets is meant.