Modern World Economy Final Terms

Isolationism

A foreign-economic policy stance in which states minimize involvement in international trade, finance, and alliances. In the interwar years, U.S. isolationism helped undermine collective responses to depression and aggression, contributing to the breakdown of the pre-1914 liberal economic order.

Cold War 

The geopolitical and ideological conflict between the United States and the Soviet Union after World War II. It shaped the Bretton Woods order, as U.S. leaders used trade, aid, and financial institutions to contain communism and integrate allies into a capitalist bloc against the spread of the Iron Curtain.

Hegemony 

Where one dominant state has the resources and willingness to provide key international public goods—such as stable money, open markets, and security. U.S. hegemony underpinned both the Bretton Woods and early globalization eras, though its relative decline raised questions about system stability.

Dualism

The coexistence of a modern, capital-intensive sector alongside a large, low-productivity traditional sector within the same economy. Dualist structures—urban industry versus rural subsistence agriculture—help explain persistent inequality and underemployment in many developing countries.

LDC’s

“Least developed countries” are low-income economies with the most severe structural impediments to development—very low per-capita income, weak human assets, and extreme vulnerability to external shocks and commodity price swings. From the 1970s through the 2000s, most LDCs remained stuck on the margins of the world economy: heavily commodity-dependent, with tiny shares of world trade, limited structural transformation, and repeated debt and balance-of-payments crises.

Multinational Corporation 

Firms that own or control production and operations in more than one country. From the early 20th century onward, MNCs became central actors in organizing global production, transferring technology, and shaping states’ policy choices through investment decisions.

Welfare State

A set of public policies—social insurance, unemployment benefits, public health, and education—aimed at cushioning citizens from market risks. In advanced economies, the expansion of welfare states after 1945 made governments more sensitive to domestic employment and distribution, influencing trade and monetary policy under Bretton Woods.

Multilaterialism

A pattern of international cooperation based on generalized rules and inclusive institutions rather than bilateral deals. Postwar multilateralism, embodied in GATT, the IMF, and the World Bank, facilitated predictable trade and financial relations and later expanded through the WTO and other regimes.

Revenue tariffs

Tariffs primarily designed to raise government revenue rather than protect domestic producers. For many low-income countries with weak tax capacity, revenue tariffs were a crucial fiscal instrument, complicating decisions about trade liberalization.

Populism

Political movements that claim to represent “the people” against corrupt elites, often skeptical of globalization, immigration, and supranational institutions. Both left- and right-wing populisms have capitalized on distributional grievances associated with trade and technological change.

Smoot Hawley

The 1930 U.S. tariff act that sharply raised import duties on thousands of goods. It triggered retaliatory tariffs abroad, deepening the collapse of world trade during the Great Depression and symbolizing the turn away from the open trading order.

WTO

The organization created in 1995 to replace and institutionalize the GATT system. It provides a permanent framework for trade negotiations, binding rules, and a dispute settlement mechanism, reflecting the deepening and legalisation of the postwar trade regime.

Vertical Integration

When a firm controls multiple stages of production or distribution in a supply chain, from raw materials to final sales. In the late 20th century, the unbundling and re-configuration of vertical integration across borders produced global value chains.

ISI

A development strategy that promotes domestic production of previously imported manufactured goods through tariffs, quotas, and state support. Popular in Latin America, South Asia, and parts of Africa in the mid-20th century, ISI aimed to reduce dependence on core economies but often created inefficiency and balance-of-payments problems.

Global Financial Crisis

The 2007–2009 crisis originating in U.S. housing and financial markets that rapidly spread through integrated global finance. Exposed vulnerabilities in deregulated banking, triggered deep recessions, and shook faith in the self-stabilizing properties of free markets.

Wilsonian internationalism

Woodrow Wilson’s vision of a rules-based, cooperative international order built on self-determination, democracy, and open markets. Its partial and selective implementation after World War I contrasted sharply with the reality of protectionism and competitive devaluations.

GATT

A multilateral agreement launched in 1947 to reduce tariffs and prevent protectionist spirals. Though originally “provisional,” GATT became the backbone of the postwar trading system through successive negotiating rounds.

Gold-dollar standard

The Bretton Woods system in which the U.S. dollar was convertible into gold for foreign central banks, and other currencies were pegged to the dollar. This arrangement effectively made the dollar the key reserve currency and anchored the postwar monetary order.

Dualism

The coexistence of a modern, capital-intensive sector alongside a large, low-productivity traditional sector within the same economy. Dualist structures—urban industry versus rural subsistence agriculture—help explain persistent inequality and underemployment in many developing countries.

Geoeconomics

Use of economic instruments—trade policy, sanctions, finance, and industrial policy—as tools of geopolitical competition. Increasingly blurs the line between national security and economic policy, especially in context of U.S.–China.

Adjustment burden

The economic and social costs borne when countries must correct external imbalances, such as trade deficits or overvalued exchange rates. In the interwar period, the gold standard’s rigid rules often forced deflationary “internal adjustment” onto debtor countries, fueling unemployment and political unrest.

MFN principle

A non-discrimination rule requiring that any trade concession granted to one partner be extended to all other GATT/WTO members. It underpinned the multilateral nature of postwar trade liberalization by generalizing bilateral deals.

Non-tariff barriers

Trade restrictions other than tariffs—such as quotas, voluntary export restraints, standards, and subsidies—that limit imports or favor domestic producers. As tariffs fell through GATT rounds, NTBs became a central focus of trade negotiations and trade disputes.

Balance of payments crises

When a country cannot meet its external payment obligations—financing imports, servicing debt, or defending its currency—leading to devaluation, IMF intervention, or default. Between the 1970s and early 2000s, many developing and emerging economies experienced recurrent balance of payments crises as global interest-rate hikes, commodity-price swings, and sudden stops in capital flows made external debts unsustainable. The 1980s Latin American debt crisis, the Mexican peso crisis (1994–95), the Asian financial crisis (1997–98), Russia (1998), and Argentina (2001–02) all followed a similar pattern: capital inflows and fixed or semi-fixed exchange rates gave way to speculative attacks, sharp devaluations, and IMF-led rescue packages. 

PTAs

Trade agreements in which members grant each other lower tariffs or other advantages not extended to outsiders (e.g., NAFTA/USMCA, EU). Do they complement or undermine the multilateral WTO system?

RTAA

A 1934 U.S. law that delegated tariff-setting authority to the executive branch, allowing the president to negotiate reciprocal tariff reductions. It marked a decisive shift from protectionism toward trade liberalization and laid institutional groundwork for postwar GATT.

IBRD

The original “World Bank,” created at Bretton Woods to finance postwar reconstruction and later development projects. It lends to governments for long-term infrastructure and development, using its high credit rating to raise funds on global capital markets.

Regional integration

Processes through which neighboring states reduce trade barriers and coordinate policies, often through preferential agreements such as the European Community/Union. Regionalism interacted with global multilateralism, at times complementing and at times challenging the WTO system.

Anti-export bias

The disincentive to export created by trade and macro policies that favor import substitution and overvalued exchange rates. In many ISI regimes, this bias hindered the growth of competitive export sectors, limiting foreign exchange earnings and long-run growth.

Eurozone sovereign debt crisis

Post-2009 crisis in several Eurozone countries, where high public debts, weak growth, and banking problems led to surging borrowing costs and bailout programs. Highlights tensions between monetary union and sovereignty.

Tripartite Monetary Agreement

The 1936 accord among the United States, Britain, and France to stabilize exchange rates and avoid competitive devaluations. It was a late interwar attempt to bring limited monetary cooperation back to a fractured international system.

IMF

The institution established to oversee the Bretton Woods monetary system, provide short-term balance-of-payments financing, and promote exchange-rate stability. Over time, the IMF evolved into a crisis-management and conditional lending institution for countries facing external shocks or debt problems.

VERs

Voluntary Export Restrictions: Trade restriction on the quantity of a good that an exporting country is allowed to export to another country (could be a preset limit, reduction in the exported amount, or complete restriction). Could happen by convincing foreign producer to restrict their own sales (e.g., US in 1968; Japanese and European steelmakers limited exports to US). Often worked through stick (industry threats of antidumping or punishments) or carrot (higher profits for foreign producers by domestic producers sharing benefits of protection). Raises prices for producers, creating a cartel between domestic and foreign producers.

EOI

A development strategy centered on producing manufactured goods for world markets, supported by competitive exchange rates, export incentives, and sometimes selective industrial policy. East Asian “miracle” economies like South Korea and Taiwan are classic cases of EOI success.

College premium

Wage gap between workers with a college degree and those without. Widened with globalization and skill-biased technological change, contributing to inequality and political backlash.

Bank run

A situation in which many depositors simultaneously withdraw funds because they fear a bank’s insolvency. In the Great Depression, bank runs transmitted panic through the financial system, collapsed credit, and exposed the fragility of unregulated banking.

Monetary trilemma and BW monetary system

The monetary trilemma states that a country cannot simultaneously have a fixed exchange rate, full capital mobility, and independent monetary policy—it can choose only two. Under Bretton Woods, countries opted for fixed but adjustable exchange rates and domestic monetary autonomy, restricting capital mobility.

Reserve currency and exorbitant privilege

A reserve currency is one widely held by central banks for international transactions and reserves. Issuers of the main reserve currency—historically the U.S. with the dollar—enjoy an “exorbitant privilege” of borrowing cheaply and running external deficits without immediate crisis.

Commodity cartels

Groups of primary-commodity exporters that coordinate output or pricing to increase bargaining power and stabilize or raise world prices (e.g., OPEC for oil). Developing countries pursued cartel strategies in the 1960s–1970s as part of broader efforts to improve their terms of trade.

Savings glut

When global desired savings exceed desired investment, putting downward pressure on interest rates. Large surpluses in countries like China and oil exporters, combined with deficits in the U.S., are often cited as contributing to asset bubbles and global imbalances before the 2008 crisis.

Wage and price flexibility (rigidity)

The idea that wages and prices must fall in response to economic downturns to restore full employment. Interwar experience showed that downward rigidity—due to institutions, contracts, and politics—made this “classical” adjustment mechanism slow and painful, amplifying unemployment.

Ricardo Viner vs. Stolper Samuelson

Two models of trade politics: Ricardo-Viner emphasizes sector-specific factors and predicts industry-based coalitions, while Stolper-Samuelson links trade to returns to broad factors (labor, capital, land) and predicts class-based conflict. Both help explain which groups supported or opposed trade liberalization in the postwar era.

Currency appreciation vs. depreciation effects

Appreciation makes a currency stronger, cheapening imports but hurting export competitiveness; depreciation does the reverse. Have distributional consequences domestically and are central to debates over exchange-rate policy and “currency manipulation.”

Inelastic supply and inelastic demand

Situations where quantities supplied or demanded respond weakly to price changes. Many primary commodities exhibit inelasticities, which can lead to large price swings and unstable export revenues for producing countries.

Global macroeconomic imbalances

Persistent current-account surpluses in some countries and deficits in others, often linked to differences in saving, investment, and exchange-rate policies. Can fuel capital flow surges, asset price bubbles, and vulnerability to crises.

Debt crisis

A situation where borrowers can no longer service existing debt, leading to defaults, restructurings, and financial instability. Interwar sovereign debt crises, especially among European war debtors and peripheral economies, undermined confidence and contributed to the breakdown of global capital markets.

Exchange rate regime (fixed vs. floating)

A fixed regime pegs a currency to another currency or a basket, while a floating regime allows market forces to determine its value. Bretton Woods institutionalized a system of fixed but adjustable pegs; its collapse in the 1970s ushered in the modern era of generalized floating among major currencies.

Kennedy Round and Tokyo Round

Kennedy Round ended in 1967, reduced avg. tariffs on non-agricultural goods to below 9% (lowest since middle of 19th c.). Industrialized countries removed most barriers to non-ag trade. Tokyo Round, ending in 1979, addressed non-tariff barriers to trade, such as subsidies, government procurement, and technical barriers to trade.

Causes of 1980s debt crisis

A combination of heavy external borrowing in the 1970s, rising interest rates in advanced economies, global recession, and falling commodity prices. These shocks made debt unsustainable for many Latin American and other developing countries, triggering defaults, IMF programs, and a “lost decade” of growth.