ECONOMIC INSTITUTION

One of the challenges in any society is how to produce, distribute,

and consume goods and services.
As individuals interacting in a social community, the process of
production, distribution, and consumption is manifested in economic
institutions, which refer to the processes where we engage with each
other as producers and consumers of goods and services.
 SOCIOLOGICAL VIEW
(To ways to look at the value and purpose of economic institution in society, either
functionalist perspective or conflict perspective)

 Functionalist Perspective – views economic institutions as vital

components of society because they are involved in the production,
distribution, and purchasing of goods and services that are essential
for survival.
 They could refer to systems, agencies, and organizations, both in the
public and private sector.
 They are involved in the production of food, clothing, and other
material items that people need and want.
 In general, it is the economic system that provides the institutional
arrangement and coordinating mechanism of the different activities
that take place in the economy.
 SOCIOLOGICAL VIEW
(To ways to look at the value and purpose of economic institution in society, either
functionalist perspective or conflict perspective)

 CONFLICT PERSPECTIVE – argues that economic institutions

emerged in order to benefit the ruling classes or groups. A major
proponent of this perspective is Karl Marx.
 This perspective asserts that economic institutions are
establisahed by the ruling class in order to benefit their major
group at the expense of ordinary laborers.
 It identifies the capitalists as the ones who perpetuate income
inequality and deprive the proletariats or the working class
access to a decent quality of life.
 NONMARKET INSTITUTIONS
 RECIPROCITY – exist when there is an exchange of goods or labor
between individuals in a community.
 This would include direct barter or simultaneous exchange of goods,
or gift exchange where the return for goods given or labor rendered is
delayed.
 Ex. When neighbors exchange food for labor rendered.
When farmers rotate among their farms to help in cultivating the
land.
 Gift exchange is different from true gift-giving where no return is
expected.
 It is understood that no money changes hands in the whole
interaction.
 TRANSFER – entails a redistribution of income that is not matched by
actual exchange of goods and services.
 Ex. Donation or financial assistance from a richer relative, or farm
subsidies given to farmers by the government.
 Transfer of productive assets due to inheritance could also qualify as
transfer payments.

 REDISTRIBUTION – can be considered as combination of the features of

transfer and reciprocity, where the economic exchange involves the
collection of goods from members, the pooling of these goods, and
then the redistribution of these goods among the same members.
 MARKET INSTITUTION
 Market system – is a type of economic system that allows the free flow of goods
between and among private individuals and firms with very limited participation from
the government.
 This type of economic system is characterized by the following key features: private
property, freedom of enterprise and choice, self-interest , competition, markets and
prices, reliance on technology and capital goods, specialization, use of money, and
an active but limited government.
 Private Ownership – encourage investment, innovation, and efficient use of the
factors of production.
- does not just refer to real property but also to intellectual property like patents and
copyrights as applied to different media like books, music, and television show
scripts.
- encourages the efficient use of the factors of production so as to raise the level of
productivity derived from the use of the said resources.
 Market – is a mechanism and not necessarily a place which brings buyers and sellers
together for a desired transaction.
 Prices – serve as signalling device to indicate the value of a good or service to both
the buyers and the sellers and guide their actions on whether they should buy or not
or supply more or less.
 Specialization – is another requirement for a market economy. Critical to a market
economy is the ability to produce goods and services efficiently. It is easier to
produce goods more efficiently with specialization. Human specialization is called the
division of labor.
- contributes to efficiency by taking advantage of the differences in each and every
person’s abilities.
- saves time by allowing individuals to concentrate all their mental and physical
faculties on a single task.
- it also avoids loss of time which takes place with shifting from one job to another.
 Market transaction – involves parties who sell their goods and
services in exchange for cash from consumers.
 Market economy – is one where the production, distribution,
and consumption of goods and services operate through
these forms of exchange.
 Free market economy - is one where the price of good or
service is determine by the forces of supply (the available
level of products or services provided by producers or sellers)
and demand (the level of willingness of consumers to
purchase).
 Ex. Sari-sari store and the food industry.
 STATE-MARKET RELATIONSHIPS
 It is in this aspect that the state plays an important role in the market. The
state, through government, comes in to regulate price to protect the
interest of the consuming public. Basic commodities such as food are
subject to price ceilings or maximum prices.
 Command economy – when the government takes over the functions of
the market in producing and distributing essential goods and services.
- in this system, instead of the market forces of supply and demand
deciding on what to produce, how to produce, and fro whom to produce.
Relies on the central government.
- it is interchanged with a socialist economy because under both systems,
the means of producing and distributing goods and services are done
collectively or centrally so that there is equitable distribution among the
members of society.
 Government - plays an important role in correcting the
imbalance in the access of goods and services through the
process of income redistribution. The primary instrument used
by governments to redistribute income is tax.
 Taxes – are compulsory contributions to government coffers,
normally levied on the worker’s income, business profits, and
consumption of goods and services, in order to raise revenues
for government spending.
 Transfer payment – are government spending on the private
sector that does not require a creation of any output. It is not
a payment for goods and services but a means of allocating
income to achieve social ends.
 INTERNATIONAL TRADE
 Economic institutions are not confined to one specific territory or geographic
location. Sovereign nations, like individuals and firms, stand to gain from
international trade by specializing in the production of commodities they can
produce with relative efficiency, and by trading with other countries for the goods
and commodities that they cannot produce as efficiently.
 There is a need for international trade because the distribution of economic
resources is uneven across different nations.
 Some countries are better endowed with skilled and inexpensive labor, while there
are countries that are endowed with expansive lands.
 One major issue against international trade is that it harms domestic industries and
particular groups of resource suppliers who cannot compete with bigger
international firms.
 The most common used protectionist measures are tariffs and quotas.
 Tariffs – are taxes on imported goods.
 Quotas – are the limits set on the quantity of imported goods that can
enter a domestic economy.
 Worse-off – the escalating tariffs and quotas will reduce the world’s total
output and everyone. This situations is called a trade war. It is the reason
that economies of the world generally agree that reciprocity is a better
principle to observe in conducting international trade.
 Reciprocity – in international trade, it is the granting of mutual
concessions among different countries with respect to commercial trade
restrictions like tariffs and quotas.
- means the lowering of the trade barriers in exchange for similar
concessions from another country.
 GATT (General Agreements on Tariffs and Trade) – is a multilateral platform of
negotiation among participating nation, which embraces the principles of
equal, non-discriminatory trade treatment for all member nations, the reduction
of tariffs, and the elimination of all import quotas.
- tariffs on thousands of different goods will be eliminated or greatly reduced.
- also entails the liberalization of government policies on some services, like
tourism, real state, advertising, and financial services.
 WTO ( World Trade Organization) – oversees trade agreements undertaken by
its member nations and also resolves trade disputes among them.
- it crafted trade rules to ensure fair competition among member nations and
their observance to international labor and environmental standards.

Prepared By: Rizalyn G. Alegre