SH1714

The Economic System

“Although your wants and desires are virtually unlimited, the productive resources available to
help satisfy these wants are scarce. Scarcity creates the economic problem.”
-Burrow and McEachern
2.1 The Four (4) Economic Systems
i. Traditional Economy
This consisted of customary patterns wherein young people followed the footsteps
of their ancestors in the choice of occupations. There is little change in the pattern of
production, in the composition of the output, and in the techniques of production.
Everything is mostly based on what is popular and production responds to what is in
demand from the people. Self-sufficient families or tribes produce goods and services only
for their own consumption. If there are surpluses, they resort to barter, the method of
exchange of goods which are of equal value.
Examples of traditional economy in the Philippines are the economies of the Aetas
of Northern Luzon and Igorots of the Cordillera Region. Hunting, fishing, and food
gathering have always been part of traditional Aeta economy. They use arrows and variety
of traps as hunting tools. Handicraft is produced for their daily needs, for ornamentation,
and for barter with outsiders. Gathering honey, rattan, kaingin farming are also known as
important livelihood activities of various Aeta groups.
The Igorots, on the other hand, subsist on irrigated rice grown in stone-walled
terraces. They also grow root crops in village gardens and hillside farms. They raise
livestock, some of which they sacrifice during ceremonial occasions. Men do the heavy
work such as securing pine timber, metal work, weaving baskets, hunting, and fishing.
Women go to spring for water, tend the crops, keep terraces in repair, and most household
work.
Outside the Philippines, traditional economies also exist like the Inuits of Canada,
the Zulu tribe of South Africa, and indigenous Polynesian people of the Pacific islands.

ii. Market Economy

The exchange and trading of goods and services is what takes place in a market
economy. This is a from of a free market and hence also known as “free market economy”.
What to produce is determined by what the people demand. In a market economy, there is
the principle known as “invisible hand” which represents the supply and demand market
forces. This defines what is produced, in what quantity, and at what price.
Transactions occur when both buyer and seller agree on the price of a given good
or service. Government intervention here is minimal and confines itself more on regulation.
People are free to engage in business. However, they must face risks in a competitive
market.
This is a from of a free market and hence also known as “free market economy”. In
this system of economy, there is a tool called the economic freedom index. It describes the
freedom to prosper in a country with little intervention from the government by 12
quantitative and qualitative factors grouped into four pillars of economic freedom:
1. Rule of Law (property rights, government integrity, judicial effectiveness)
2. Government Size (government spending, tax burden, fiscal health)
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3. Regulatory Efficiency (business freedom, labor freedom, monetary freedom)

4. Open Markets (trade freedom, investment freedom, financial freedom)
Each of the twelve economic freedoms within these categories is graded on a scale
of 0 to 100. A country’s overall score is derived by averaging these twelve economic
freedoms. The freedom is described by a country’s score as follows:
Freedom Score Range
1. Free 80-100
2. Mostly Free 70-79.9
3. Moderately Free 60-69.9
4. Mostly Unfree 50-59.9
5. Repressed 40-49.9
Table 2.1.1
In the tables below, Table 2.1.2 gives the top 5 countries with highest scores and
the rank of the Philippines based on 2017 Index of Economic Freedom.
FREE
Rank Country Score
1. Hong Kong 89.8
2. Singapore 88.6
3. New Zealand 83.7
4. Switzerland 81.5
5. Australia 81.0
⋮ ⋮ ⋮
MODERATELY FREE
Rank Country Score
56. Hungary 65.8
57. Slovakia 65.7
58. Philippines 65.6
59. Saint Vincent and the Grenadines 65.2
60. Turkey 65.2
Table 2.1.2
The Philippines has achieved economic expansion, driven by the economy’s strong
export performance and inflows of remittances that have bolstered private consumption.
The absence of entrepreneurial dynamism, however, still makes long-term economic
development a challenging task. During the six-year term of President Benigno Aquino III
(2010–2016), the Philippines became one of the best-performing economies in the Western
Pacific. It ranks 14 over 43 in the Asia-Pacific.

iii. Planned Economy

A planned economy is the complete opposite of a market economy. It is mostly
government controlled with the government deciding everything. The government decides
what gets produced, how to produce, for whom to produce, at what quantity, and at what
price. Two countries, which are known as best examples of planned, or command economy
are China and the former USSR. Other nations completely embracing this economy are
North Korea, Vietnam, and Cuba. The state-owned, as well as private enterprises, receive
guidance and directives from the government regarding economic problems.
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iv. Mixed Economy

Planned and market economies blend together in mixed economies. The
government will have input in some economic problems; however, the rest of the activities
will be driven by the decisions of the buyers and sellers. No country has a completely free
economy, meaning there will always be government intervention.

2.2 Production Possibility Frontier

Definition – Production Possibility Frontier (PPF) represents the point at which an
economy is most efficiently producing its goods and services and therefore allocating its
resources in the best possible way.
There are just enough resources
producing goods/services. If the economy is not
producing the quantities indicated by the PPF,
resources are being managed inefficiently and
the stability of the economy will dwindle. The
production possibility frontier shows us that
there are limits to production, so an economy, to
achieve efficiency, must decide what
combination of goods and services can and
should be produced.
For example, consider the image on the
left side. Suppose an economy can produce
Source:http://www.investopedia.com/university/econo products M and N. The PPF shows a curve (PPF
mics/economics2.asp
curve) that represents the most efficient use of
resources by the economy. Points A, B, and C all appear on the PPF curve, which means that
production of products M and N is efficient at these points. For instance, producing 5 units of
product M and 5 units of product N (point B) is just as desirable as producing 7 units of product
M and 3 units of product N (point A). Point X represents an inefficient use of resources, while
point Y represents the goals that the economy simply cannot attain with its present levels of
resources. When there is economic growth, the PPF curve shifts outward. Alternately, when
the economy shrinks as a result of a decline in its most efficient allocation of resources and
optimal production capability, the PPF curve shifts inwards.
In order for this economy to produce more product M, it must give up some of the
resources it is currently using to produce product N (point A). If the economy starts producing
more of product N, (represented by points B and C), it would need to divert resources from
making product M and, consequently, it will produce less of product M than it is producing at
point A. From the figure, by moving production from point A to B, the economy must decrease
product M production by a small amount in comparison to the increase in product N output.
However, if the economy moves from point B to C, product M output will be significantly
reduced while the increase in product N will be quite small. Keep in mind that A, B, C, and
any point on the curve all represent the most efficient allocation of resources for the economy;
the nation must decide how to achieve the PPF and which combination to use. If more product
M is in demand, the cost of increasing its output is proportional to the cost of decreasing
product N production. Markets play an important role in telling the economy what the PPF
ought to look like.

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In addition to explaining efficiency, PPF can help introduce many of the most basic
concepts of economics.
1. It illustrates the definition of economics as the science of choosing what goods to
produce.
2. It provides a rigorous definition of scarcity and shows the outer limit of producible
goods dictated by the law of scarcity. (Scarcity is a reflection of the limitation on
our living standards imposed by the PPF.)
3. It illustrates the three basic problems of economic life – what, how, and for whom.
4. It illustrates the general point that we are always choosing among limited
opportunities.

2.3 Opportunity Cost

Definition – The opportunity cost of the chosen item or activity is the value of the best
alternative you must pass up.
Guidelines in specific economic decisions:
i. Calculate opportunity cost – Economists assume that one’s rational self-interest will lead
him to select the most valued alternative. The chooser seldom knows the actual value of
the best alternative he gives up. The chooser only knows what is expected, or what is the
estimated opportunity cost.
ii. Consider time involved – The chooser always faces time constraint. Each activity one
undertakes has an opportunity cost in form of time.
iii. Ignore sunk cost – sunk cost is the cost one has already paid and cannot recover. One
should ignore sunk cost and switch to a new choice that offers much better opportunities.
Economic decision-makers should consider only those costs that are affected by their
choice. Sunk costs are irrelevant therefore and should be ignored.

2.4 Socio-economic Development Program of the Philippines

Sustainable development is a development that meets the needs of the present without
compromising the ability of the future generations to meet their own needs. To ensure that
development is life-sustaining, there must be harmony in economy, society, and ecology. An
action plan of the United Nations (UN), called Agenda 21, recognizes that sustainable
development is primarily the responsibility of governments.
Agenda 21 was an outcome of the United Nations Conference on Environment and
Development (UNCED) held in Rio de Janeiro, Brazil, in 1992. It is a comprehensive blueprint
of action to be taken globally, nationally, and locally by organizations of the UN, governments,
and major groups in every area in which humans directly affect the environment. This requires
national strategies, plans, and policies and the efforts of nations need to be linked by UN.
Public participation, active involvement of non-governmental organizations, and other groups
should also be encouraged.
The objectives of Agenda 21 require substantial assistance for developing countries to
cover the incremental costs of actions to deal with global environment problems and to
accelerate sustainable development. Money is also needed to allow international bodies to
implement recommendations of Agenda 21.

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A development framework for the 21st Century has been formulated under the Long-
Term Philippine Development Plan (LTPDP), 2000-2025 or Plan 21. This framework
recognizes the new millennium will increasingly call for economic development to become
less ecologically destructive. Plan 21 sets the broad developmental directions of the country
and will provide detailed plans of the sector agencies. It ensures the continuation of policies
based on self-responsibility, productivity, the creation of opportunities through competitive
markets and enlightened government regulation.
The Philippines has also established a national Agenda 21 called the Philippine Agenda
21, or PA 21. It provides for the creation of an enabling environment which would assist
various stakeholders to integrate sustainable development in their decision-making processes.
One of the strategies adopted is the institutionalization of the system of Environmental and
Natural Resources Accounting (ENRA). This is a management tool for integrating
environment and the economy. Various initiatives are currently underway to consider and
adequately value natural capital and environmental services in socio-economic decisions as
well as the establishment of a reliable database on the valuation estimates of environmental
services.

The Philippine Agenda 21 (PA21)

At the 1992 earth summit in Rio de Janeiro in Brazil, over 160 countries, including the
Philippines, pledged to pursue sustainable development. This agenda attempted to find the
balance between development and its impact on the environment and society. As a result, the
Philippine government under former president Fidel V. Ramos created the Philippine Council
for Sustainable Development (PCSD), which subsequently produced PA21.
PA21 is the nation’s blueprint for sustainable development, describing a path for
individuals, families, and communities; action plan for coastal/marine, freshwater, upland,
lowland, urban ecosystems; and interaction of life and landscapes therein. It promotes harmony
and achieves sustainability by emphasizing:
1. A scale of intervention that is primarily area-based.
2. Integrated island development approaches where applicable.
3. People and integrity of nature at the center of development and initiatives.

Seven Dimensions of Development

1. Spiritual development – Unless we see and explicitly acknowledge the spiritual in
nature, human beings and society in our framework of development, we can never do
justice to the strong sense of Philippine spirituality that permeates Philippine Agenda
21.
2. Human development – Existing measures of human development, such as the Human
Development Index (HDI), which are limited to health, education and income, indicate
some improvement over time. This improvement has in part been achieved through
greater empowerment of the populace.
3 & 4. Social and Cultural development
a. Promoting resource access and upholding property rights
b. Promoting environmental awareness, inculcating environment ethics and
supporting environment management action
5. Political development
a. Empowering the people
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b. Maintaining peace and order

6. Economic development
a. Maintaining a sustainable population
b. Maintaining productivity and profitability of environment and natural resources
7. Ecologic development
a. Adopting environmental management weapons in policy and decision-making
b. Protecting the environment and conserving natural resources

Principles of sustainable development under PA 21

1. The primacy of Developing Full Human Potential. This puts man at the center of all
development efforts.
2. Holistic Science and Appropriate Technology. Implies development of appropriate
technology to solve development problems with due consideration to its impact to society
and ecology.
3. Cultural, Moral and Spiritual Sensitivity. Considers the inherent strengths of local and
indigenous knowledge, practices and beliefs, while respecting cultural diversity, moral
standards and the spiritual nature of the Filipino society.
4. National Sovereignty. Self-determination at the national level to pursue social and
ecological concerns in its governance to achieve human, environmental and food security.
5. Gender Sensitivity. Recognize the importance of complementary roles and empowerment
of both women and men in development.
6. Peace, Order and National Unity. Makes sure that the right of everyone to a peaceful and
secure existence is respected.
7. Social Justice, Inter- and Intra- Generational Equity and Spatial Equity. Equal
distribution of resources to everyone (including future generations) and the provision of
equal access to development opportunities and benefits to all.
8. Participatory Democracy. Puts value and support to the participation of all in the
decision-making process.
9. Institutional Viability. Since SD is everyone’s concern, institutional structures should
promote joint responsibility, unity, and partnership among all.
10. Viable, Sound and Broad-based Economic Development. Requires working for
development that is based on stable economy, where everyone equally shares the benefits
of progress.
11. Sustainable Population. Needs to maintain a number of people that can be supported by
the limited capacity of our natural resources.
12. Ecological Soundness. Requires that we recognize the earth as a common heritage that
belongs to all of us, and everyone should care for its capacity to support us and the future
generations.
13. Bio-geographical Equity and Community-Based Resource Management. Means
entrusting to the people residing near or within an ecosystem the primary right to manage
its resources.
14. Global Cooperation. Requires international solidarity of every nation’s effort to build a
better life and safer environment.

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The Philippine Agenda 21 Visions

PA 21 envisions a better quality of life for all Filipinos through the development of a
just, moral and creative, spiritual, economically vibrant, caring, diverse yet cohesive society
characterized by appropriate productivity, participatory and democratic processes, and living
in harmony and within the limits of the carrying capacity of nature and the integrity of creation.
1. Poverty Reduction: Poverty is a central concern of sustainable development. Consistent
with this, the various consultations for the updating of PA 21 have yielded poverty
reduction agenda that includes measures to create an enabling economic environment for
sustained and broad-based growth; improve employment, productivity, and income; and
attain food security.
2. Social Equity: Social equity should mean allocation of resources on the bases of efficiency
and equity to achieve balanced development. Efficiency and equity mean the channeling
of resources to developing areas where greater economic benefits accumulate and where
there is a greater need, the distribution being dependent on the practicality and urgency of
needs.
3. Empowerment and Good Governance: Empowerment is a precondition of informal
choices. Good governance is a necessary precondition to empowerment, as empowerment
is to good governance. These two are a defining element of each other.
4. Peace and Solidarity: The cycle of poverty and conflict goes on as the costs of war escalate
in terms of various kinds of destruction while withholding funds for basic services,
resulting in more poverty and underdevelopment.
5. Ecological Integrity: In general, the path towards enhancing the integrity of the country’s
ecological domain will have to involve the heightened and sustained implementation of
environmental laws, as well as the continued pursuit of resource conservation, and
environmental restoration/enhancement programs.

References:
Aeta Economy. (n.d.) In DocShare. Retrieved from http://docshare01.docshare.tips/files/23956/239565304.pdf.
Belicano, R. (2011, December 12). Philippine agenda 21. Retrieved from https://www.slideshare.net/roxannebelicano/philippine-
agenda-21.
Burrow, J. L. & McEachern, W. A. (2017). Applied economics: An introduction. Quezon City, Philippines. Abiva Publishing
House, Inc.
Country Rankings. (2017). In 2017 Index of Economic Freedom. Retrieved from http://www.heritage.org/index/ranking.
Hayes, A. (n.d.). Economics basics: production possibility frontier, growth, opportunity cost and trade. In Investopedia. Retrieved
from http://www.investopedia.com/university/economics/economics2.asp.
Leaño, R. D. (2016). Applied economics: For senior high school. Manila, Philippines. Mindshapers Co., Inc.
Sagada Igorot – Economy. (n.d.) In Countries and their Cultures. Retrieved from http://www.everyculture.com/East-Southeast-
Asia/Sagada-Igorot-Economy.html
United Nations Commission on Sustainable Development. (1998, April 1). Institutional aspects of sustainable development in the
Philippines. Retrieved from http://www.un.org/esa/agenda21/natlinfo/countr/philipi/inst.htm

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