BMB1701

The Economic System

2.1 Examples of Economic Systems
i. Traditional Economy
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 the 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

Each of the 12 economic freedoms within the four (4) Pillars of Economic Freedom
is graded on a scale of 0 to 100. A country’s overall score is derived by averaging these 12
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
The table below (Table 2.1.2) gives the top five (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
02 Handout 1 *Property of STI
Page 1 of 4
 BMB1701

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 (1) of the best-performing economies in the
Western Pacific. It ranks 14 over 43 in the Asia-Pacific.

iii. Planned Economy

Two (2) countries, which are known as best examples of planned, or command
economy are China and the former Soviet Union. 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.

iv. Mixed Economy

No country has a completely free economy. Meaning, there will always be
government intervention.

2.2 Production Possibility Frontier (PPF) Example

Consider the image on the left side. Suppose an
economy can produce products M and N. The
Source:http://www.investopedia.com/university/econo PPF shows a curve (PPF curve) that represents
mics/economics2.asp
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

02 Handout 1 *Property of STI

Page 2 of 4
 BMB1701

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.

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 Guideline Examples

i. Calculate opportunity cost
 You decided to go on a picnic to enjoy eating outdoors instead of going to a restaurant.
It rained on the day of your picnic, so it would’ve been better to have went to a
restaurant to eat.
 You chose to buy a pair of shoes for work instead of a bag you can use to put your
personal belongings in. However, you found out that the shoes actually don’t fit
comfortably, so it would’ve been better to have just bought the bag.
 You chose to watch Movie A over Movie B because you found Movie A’s trailer to be
interesting. It turns out that Movie A was actually horrible, and that Movie B had a
surprise ending that would’ve interested you more.
ii. Consider time involved
 Because you’re hungry, you chose to eat on a famous restaurant instead of a fast food
chain because of their delicious food. However, you eventually found out that you have
to book and queue in order to be seated on the restaurant before you can actually order
and eat, compared to how you can easily be accommodated in a fast food chain to eat.
 You chose a simple savings account to put your savings in instead of a 30-year
investment trust fund. While the savings account allows you to immediately get your
money regardless of the amount of time it has been in the account, you found that
putting money in the trust fund will actually make the money grow by 8% each year
just by letting the money “sit” in the fund, compared to having it in the savings account.
iii. Ignore sunk cost
 A customer just finished shopping and is wheeling his shopping cart to the checkout.
He decided to join a line that he thinks will take the least time. After waiting 10 minutes
in a line that barely moves, a cashier opened a new line and invited him to check out.
The sunk cost in this scenario is time.

02 Handout 1 *Property of STI

Page 3 of 4
 BMB1701

 A guy just went on a movie that costs ₱250 expecting that it is the “movie-of-the-year”,
but halfway across the movie, he finds it to be boring. The sunk cost in this scenario is
time and money.

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

02 Handout 1 *Property of STI

Page 4 of 4