Conceptual and practical issues in constructing composite indices

Abstract

This chapter 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 multi-dimensional, 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 criticised for 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.