I'm not close enough to my neighbors to do a gift exchange. However, if I were to do a gift exchange with similarly minded people, I'd gift things like:
A handmade lap quilt-- I got a steal on batting, and you can make beautiful quilts using remnants, fat quarters, on-sale fabric, even old dress shirts. They take some time to make (I could machine piece/quilt for speed), but materials cost could be well under $25.
Homemade-- cookies, dog treats, pies, salsa, jam, relish, mint tea (from mint I grow in my yard), cake, bread, candy, hotpads, recipe book with my favorite recipes, etc.
An adirondack-style chair made from leftover wood I have on hand (would need to buy 2 x 6's and nails/screws).
Side table for indoor or outdoor use (they get a pretty aged look). Some 1x2s, nails/screws, and a 12x12 tile.
If used buy still usable items-- dvds, books