The Fallacy of Composition: A Review of the Literature

• Published in: World economy Vol. 25; no. 6; pp. 875 - 894
• Main Author: Mayer, Jörg
• Format: Journal Article
• Language: English
• Published: Oxford, UK and Boston, USA Blackwell Publishers Ltd 01.06.2002; Blackwell Publishing Ltd
• Subjects: China; Developed countries; Developing countries; Development policy; East Asia; Economic development; Economic theory; Export promotion; International trade; LDCs; Manufacturing; Market shares; Newly industrializing countries; Protectionism; South Asia; Studies; Terms of trade; World economy; World Trade Organization
• ISSN: 0378-5920; 1467-9701
• DOI: 10.1111/1467-9701.00468

This paper reviews the literature on the fallacy of composition with an emphasis on labour‐intensive manufactures. It briefly addresses the protectionist and the partial‐equilibrium versions of the argument before focusing on general‐equilibrium considerations and the debate on the manufactures terms of trade of developing countries. The review indicates a potential fallacy of composition problem in labour‐intensive manufactures, where competition among different groups of developing countries for export market shares may constitute a new form of the fallacy of composition. The likelihood of a country that exports labour‐intensive manufactures to become subject to the fallacy of composition rises with the increasing integration of several strongly populated low‐income countries into world markets, while it declines with continuous structural change and favourable aggregate demand conditions particularly in developed and the advanced developing countries.