It's the 'you scratch my back and I'll scratch yours' of linkbuilding - you put a link to my site on your site, and I'll put a link to yours on mine. Not the best sort of backlink, one-way is always better.
Reciprocal links are links between 2 sites, based on an mutual agreement by the webmasters to exchange links.
Yep, reciprocal links work well, just make sure you build your linking page well so that it doesnt just look like a link farm. Try to give a description of each site or even better work the links into some of your content.