MODULE: ECONOMIC INSTITUTIONS

WHAT IS ECONOMY
An economy encompasses all activity related to the production, consumption, trade, and distribution of
available goods and services. The management of those resources is used to satisfy the needs of the
people, businesses, organizations, and governments in a specific area.
An economy encompasses all activity related to the production, consumption, trade, and distribution of
available goods and services. The management of those resources is used to satisfy the needs of the
people, businesses, organizations, and governments in a specific area.
Economic institutions
-are those that are involved in the production and distribution of the goods and services that members of a
society need. Economic exchanges, which are an important part of a functioning economy, happen for
different reasons and through different ways. Because societies greatly differ from each other in terms of
culture, their systems of economic exchange may also vary.
Reciprocity
-refers to the voluntary giving or taking of objects without the use of money in the hopes that, in the future,
they could be given back. Reciprocity could take the form of barter, hospitality, gift-giving, and sharing. You
might not realize it, but people engage in reciprocity most of the time. Simple activities like borrowing and
returning a pen could be categorized as reciprocity. In societies, however, reciprocity means more than just
a simple social activity. The aim of engaging in reciprocity is to build and strengthen social relationships as
well as acquire more means or favors. As you may recall from earlier lessons, social relationships are
needed to expand personal and cultural development at the macro and micro level. Gaining more favors
through reciprocity contributes to this development by allowing people to maximize their options in times of
need.
A good example of reciprocity is the Filipino culture of utang na loob. This is an act of kindness or favor
that is expected to be given in return. For instance, Filipinos who seek help from their acquaintances in
accomplishing any specific task, such as looking for a job or securing a personal loan for the family, would
see themselves indebted to their friends. When the time comes that the friend asks for a favor, it is common
practice to help him out in return. In our country, utang na loob is not mandated by any law or legal
document. It is, however, part of our unique culture and identity as Filipinos. In the same way, exchanges at
the larger-scale could be facilitated through reciprocity. For example, it is common nowadays to see big
companies partnering up with each other in hosting big events and promotions. These partnerships allow
companies to gain favors from each other and at the same time, benefit from each other. Among national
governments and states, the same process also occurs. This could be seen especially in times of
calamities or disasters. For instance, the disastrous effects of Typhoon Yolanda in 2013 that took hundreds
of lives and destroyed thousands of properties in the Samar and Leyte region caught the attention of many
countries, private institutions, non-government organizations, and even individual donors. All of them
helped the Philippines through different means. While the Philippines was able to survive the heavy impact
of Typhoon Yolanda, our country is still indebted to those who helped us survive the unfortunate event. As
such, when other countries are facing risk and disaster, the Philippines is also expected to return the favor
by helping out.
Forms of Reciprocity
Generalized Reciprocity
GENERALIZED RECIPROCITY is the exchange of goods and services without a definite time frame of
when the favor should be returned. In this form of reciprocity, individuals giving out the favors do not expect
to receive anything back. Such activity is commonly done among small groups or societies. A good
example of this is your relationship with your family and closest friends. When you are given food by your
parents, for instance, do they expect you to buy them food in return? Parents usually do not ask their
children to repay them for what they are given. At the same time, children are not obliged or pressured to
return the favor as well. The same situation goes for close friends. While they may expect more, close
friends who do favors for one another usually do it out of love, concern, or camaraderie, and not for any
economic gain.
Among societies, generalized reciprocity occurs in smaller groups like bands or tribes where high
importance is placed upon the culture of sharing. Nevertheless, all human populations experience this form
of reciprocity.
BALANCED RECIPROCITY, exchange occurs between groups or individuals with the donor expecting to
receive something of equal or similar value. In this form, no haggling occurs between two parties, and the
exchange of goods occurs at a particular rate set upon by the groups. There is pressure to give back the
favors at a specific point in time. Unlike generalized reciprocity, balanced reciprocity demands timely
reciprocation that when favors are not received by the donor, they could refuse to continue giving out the
favors. Among groups, the effects of non-compliance could result in gossiping, refusal to commit to any
other transaction, forced reciprocation, or strained relationships. In pre-industrial societies, balanced
reciprocity is usually organized through trade agreements. This would mean that one member of a group
has a designated partner in another whom he or she chooses to trade goods with. The pair is responsible
for organizing the terms of their exchange, but no bargaining would still occur.
NEGATIVE RECIPROCITY, groups try to maximize their gains while giving as little as possible. This form is
usually motivated by the desire to acquire a large number of goods using minimal resources. Negative
reciprocity is similar to market exchange; however, in negative reciprocity, no monetary exchange occurs
among groups. In pre-industrial societies, therefore, negative reciprocity is important, especially when
groups need to acquire products that are not easily accessible to them. In common terms, groups could
“import” products that they need from other groups, and in order to reduce the favor, barters and bargaining
occur. Groups would maximize their resources to gain favorable outcomes and products from their goods.
Also called “government transfer” or “transfer payments,” transfers are a redistribution of wealth and
income where no goods or services are being given to the donor in return. Among state societies, transfers
are required payments that could take form through the collection of taxes, social services, pensions,
housing, and healthcare. To better understand the concept of transfers, let us use the current Philippine
economic setting as an example. In every economy in the world, importance is placed upon the Circular
Transfers and the Government
The government plays a crucial role in ensuring that transfer payments are collected successfully from
participating citizens and institutions. In the government’s case, public goods are provided to people
through various programs and activities that benefit its citizens. Among the different allocations of transfer
payments, governments usually give priority to retirement and disability benefits, medical benefits,
unemployment insurance, and education and training.
Redistribution
It occurs when individuals’ goods or services are pooled together by a central authority to be used at a later
time. The central authority may refer to a regional collection point, a storehouse, or the national capital.
Note that the main difference between redistribution and reciprocity is that the latter refers to an exchange
where goods are passed back and forth from one group to another.
Redistribution, on the other hand, focuses on the collection of goods from individuals in a community to be
kept by a central authority. These goods are collected to be used in the future by the same group. Products
often move along the hierarchy, where one official transfer the goods into the care of another until they
reach storage. While in storage, it is possible for members of the central authority to consume some of the
goods that are kept for the future. However, because the primary aim of redistribution is to allocate such
goods back to the people, the central authority should do so. Doing such requires a reversal of processes—
from the storage area to the central authority, and ultimately back to the common people.
BARTER
Is the exchange of (goods or services) for other goods or services without using money.
Understanding Market Transactions
Over a long period, many societies have evolved and have adopted a capitalist economy where the market
principle dominates. This principle implies that the market is responsible for the sale and distribution of
goods and services. A prominent concept in discussing market transactions is market exchange which
refers to the organized process of sale and distribution at money price. This would imply that for all forms of
transactions within a market, money is heavily utilized. Note, however, that a market, in this sense, does
not just refer to a physical structure (such as a public market) where local goods are sold to consumers.
A market, in economic terms, refers to a bigger setting where buyers or sellers simultaneously trade or
exchange goods or services. Markets could imply a global setting where states engage in market
transactions to exchange goods or services.
In a market exchange, at least two people should be involved: one who has a product and another who has
the money. Using a system of barters and bargaining, the two individuals agree upon a specific price for a
specific quantity of the product. To further understand this concept, let us use your personal experience as
an example. Dining out at restaurants by yourself or with your family is an example of market exchange.
When you eat out, you allot a specific amount of money to buy food. The same amount of money you have
allotted could buy specific quantities of products from the menu. When you pay for your food at the cashier,
you are already engaging in a market transaction because you gave up your money in exchange for goods
or services, which in this case, is food. Thus, all forms of market exchange would require the following: a
medium of exchange, a rate at which products are exchanged for money, and parties who are involved in
the exchange (i.e., buyers or sellers).
Elements of Market Transactions
In understanding market transactions, it is important to also familiarize yourself with the elements that make
up market exchanges. Note that these elements are also important in balancing the economy.
Element Description
 Money-It consists of objects that serve as means of exchange for goods and services.
 Prices-It is the amount required or agreed upon by the exchanging parties. It is the amount of
money used in exchange for a certain product.
 Supply-It refers to the quantity of goods or services that are available to sell at a given price and
period of time.
 Demand-It refers to the quantity of goods or services that consumers are willing to purchase at a
given price and time period.
The Interaction of States and Markets
Providing an in-depth concept of the state requires a look at markets and vice versa. States need to foster
economic growth to provide a good standard of living to its citizens. At the same time, markets exist
because of the economic activities done by the state. As such, we could easily conclude that markets and
states are dependent on each other. This interaction between states and markets opens up the field of
international political economy. This phenomenon also drives changes to the holistic development of a
nation. One prominent example of the effects of the interactions between states and markets is the case of
China where developments on both their market and state needs were emphasized and utilized in their
reform programs.
As an effect, the country developed societal and economic growth over the past two decades. The market-
based and state-based reforms and developments that China implemented rested highly upon the
transformation of people’s communes, state-owned enterprises, decentralization, price reform, and capital
market development.
Reviewing the steps that China did to achieve economic and societal growth and progress, we could easily
conclude that the best way to uplift the economy and the state itself is for the two entities to complement
each other in their respective political and economic processes. For instance, to ensure the successful
market transactions, states need to be positive catalysts in ensuring an environment that is highly beneficial
for market activities.
ACTIVITY: ½ Crosswise: To be submitted on November 11, 2024
Assessment Questions:
1) What is the main difference between market and non-market transactions?
2) Provide an example of each type of transaction.
3) Why are non-market transactions important in the economy?