Conceptual issues in constructing composite indices

Abstract

This paper presents an analysis of the conceptual issues associated with the construction of composite indices. Composite indices, which are constructed by averaging a number of indicators or sub-indices, are multidimensional, in that they represent aggregate measures of a combination of factors. They are often used to simplify complex measurement constructs, and often have a strong political appeal due to the fact that they simplify complex matters into a single number. However, composite indices are often criticized due to their subjectivity. Indeed the methodology used to construct an index generates considerable debate on various aspects, such as the weighting method used, possible correlation among the different sub-indices, missing variables, standardisation procedures and others. This paper will attempt to propose some desirable criteria for the construction of composite indices, including simplicity, ease of comprehension, and coverage issues and transparency. It will also discuss a number of methodological considerations including weighting. An analysis and evaluation of the different methods used by a selection of renowned composite indices, including the University of Malta’s resilience index, and the effects of certain assumptions on results will also be carried out.