EXCHANGE AND ECONOMIC

SYSTEM

Group Members:
Rimsha- 14
Kinza Zameer-09
Aimen Bibi-06
Fakiha Shaheen-23
 Economic System

• Economics is the part of society that deals with production, distribution, and
consumption of goods and services.
• It is a source by which societies or government organize and distribute available
resources, services, and goods across a geographic region or country.
• Economic systems are used to control the five factors of production, including: labor,
capital, entrepreneurs, physical resources and information resources.  An economic
system encompasses many institutions, agencies, and other entities.
•  The economic system is composed of people, institutions and their relationships. It
addresses the problems of economics like allocation of the resources.
 Economic Systems
We use the word economics in its everyday

• Economics is how people make their living societal level, three processes are involved in
making a living.
 Production:
• Making goods or money
• People work and use technology to transform nature’s resources into useful
products.
 Exchange:
• They produce or process information, sell something to someone else
 Cont..

 Consumption:

• Someone consumes the products.

• We consume material products by eating, living in, driving, wearing, and so forth.

• food nourishes, houses shelter, motor vehicles transport, and clothes cover.
 The Economic Problem

• Limited resources but unwanted wants results in scarcity.

• Scarcity is the economic condition where all resources, though plentiful,
are not sufficient to meet human wants.
• The problem of scarcity forces the main economic agents to make choices
• These economic agents decide how the scarce resources will be allocated.
For example, the distribution of the economic scarce resources among
alternative uses.
 How does the Economy work?

 The country must answer three basic economic questions:

• What goods and services should be produced?

• How should the goods and services be produced?
• For whom should the goods and services be produced?
 The way a nation answers these questions defines their economy.
 Conti..

 What to produce?
• Since resources are scarce they must be used to produced the most needy products and in the most
efficient way.
• Should the economy produce only basic items that people need or what they want.
 How to produce?
• The method of production (flow, batch or job), type of raw material, and type of labor should be
decided on.
• Capital intensive vs. labor intensive production.
• Scale of production: large or small scale.
 Conti..

 For whom to produce?

• A decision on how the products will be distributed should be made.

• Some goods are distributed on the ability to pay the price while the
government might distribute goods on a basis of needs. For
example; subsidize housing, free tuition and healthcare.
 Types of Economic Exchange System

There are three types of economic exchange system. These are:

• Reciprocity
• Redistribution
• Market
 Reciprocity

• Back-and-forth exchange of products, gifts, and objects, symbolizes

relationships as well as satisfies material needs and wants. 
• It refers to the non-market-exchange of goods or labor ranging from direct
barter (immediate exchange) to forms of gift exchange where a return is
eventually expected (delayed exchange) as in the exchange of birthday gift.
• Creating, maintaining, or strengthening social relationships, or obtaining
products made by other for oneself.
 Benefits
• Reciprocity is a binding mechanism in that its continuance helps to hold
friends and families together. 
• Reciprocal exchanges generally do not redistribute a society's wealth in a
way that causes some people to become richer than others. Rather, they
usually result in a circulation of goods and services.
 Types of Reciprocity

There three types of Reciprocity. These are:

• Generalized Reciprocity
• Balanced Reciprocity
• Negative Reciprocity
 Generalized reciprocity

• It refers to an exchange that incurs no calculation of value or immediate repayment

of the goods or services.
• This usually happens among close kin and friends; e.g., !Kung hunters sharing
meat with other members of the family or buying a cup of coffee for a friend. It
acts as a form of social security among kin—sharing with family ensures that they
in turn will share with you.
• Generalized reciprocity has an element of altruism to it. Think about a person who
makes a bunch of sandwiches and then hands them out to the homeless. That
person is distributing food without expectation of repayment.
 Balanced reciprocity

• It involves calculation of value and repayment of the goods or services within a

specified time frame.
• Gift giving in modern society is an example of balanced reciprocity. As adults,
when gifts are given there is an expectation that we will receive a gift of equal
value in return at a fixed point in the future. For instance, if we receive a birthday
gift from a friend, it is expected that we will give that friend a gift of similar
value on their birthday.
 Negative reciprocity

• It occurs when one party attempts to get more out of the exchange than the other
party.
• This can happen through hard-bargaining, deception, stealing, or even selling
food at an inflated price because there is no other option;
• For example, vendors at special events.
 Redistribution

• Redistribution refers to the movement of goods or services to and from a central authority.
• The authority may be a single individual, e.g., a chief, or a group of people, e.g., temple
priests.
• The central authority may not be interested in accumulating wealth for themselves, but use
the distribution of goods and services to create interdependence among the parties involved.
• In industrial societies, progressive income taxes are an example of redistribution—taxes are
collected from individuals dependent on their personal income and then that money is
distributed to other members of society through various government programs. Charitable
donations function similarly.
 Market Exchange

• The third way that societies distribute goods and services is through
market exchange.
• Markets are social institutions with prices or exchange equivalencies.
• In market products are sold for money, which in turn is used to purchase
other products, with the goal of acquiring more money or accumulating
more products or both.
 Advantages
• Market system automatically responds and adjusts to the people’s wants
• Wider variety of goods and services
• Competition pushes businesses to be efficient
• Government does not have to take decisions on basic economic questions
 Disadvantages
• Factors of Production is not employed if it is not profitable
• Market system may not produce certain goods and services
• Free market may encourage harmful goods
• Production may lead to negative externalities
• Free market economy may increase the gap between the rich and the poor
 Requirements of Market Exchange

• Some objects that serve as a medium of exchange-money.

• A rate at which particular goods and services exchange for money- price.
• The prices are determined by supply and demand.
• Most property is privately owned.
 Role of Governments in Market Economies

• Their role is to:

- to protect and enhance the market.
- Print money and control the money supply.
- break up some monopolies
- pay for public goods and infrastructure
-regulate polluting industries
- protect private property with laws, police, and courts.
- prohibit insider trading in stock markets.
-Allow markets to run smoothly.
 Conclusion
• Large Scale Production
• distribution of goods and services
• Satisfaction of Wants
• Proper Utilization of Natural Resource
• Rise in the Standard of Living
• Expansion of Market
• Increase in Efficiency
• Benefit to Both Parties
Thank You