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LERNER INDEX: The difference between price (p) and marginal cost (mc) as a fraction of price, that is [p-mc]/p. The Lerner index is usually taken as an indicator of market power because the larger the index, the larger the difference between price and marginal cost, that is, the larger the distance between the price and the competitive price. The Lerner index depends on the elasticity of demand. The Lerner index is also called the price-cost margin.

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Lesson 18: Banking | Unit 2: Banking Details Page: 5 of 24

Topic: Commercial Banks <=PAGE BACK | PAGE NEXT=>

The first type of financial institution is a traditional bank.

Traditional banks have a long history in the economy:

  • They were the original financial intermediaries.
  • They diverted household income into loans for business investment.
  • They offered checking accounts.

They were heavily regulated entities:

  • The big ones, the national banks, were subject to the regulations by the Federal Reserve System, the Federal Deposit Insurance, etc.
  • Other banks, more numerous, but usually smaller, were chartered and regulated by state or local agencies.

Before the 1970's:

  • Banks were the only financial intermediaries that offered checking accounts.

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NATIONAL INCOME AND NET DOMESTIC PRODUCT

National income (NI) is the total income earned by the citizens of the national economy resulting from their ownership of resources used in the production of final goods and services during a given period of time, usually one year. Net domestic product (NDP) is the total market value of all final goods and services produced within the political boundaries of an economy during a given period of time, usually a year, after adjusting for the depreciation of capital. Although national income is generated by the production of net domestic product, the value of production does not entirely result in earned income. In other words, national income can be derived from net domestic product after a few adjustments.

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