How to Construct Composite Indicators

We've discussed some of the concerns in creating an index before. Now here's a new tool for those who want to construct composite indicators. If you need to do it, here's how to do it right! The following is taken from the website and a press release from ISQOLS - the International Society for Quality-of-Life Studies. To access the ISQOLS Listserve Archive visit the following website: http://listserv.vt.edu/archives/isqols-listserv.html

HANDBOOK ON CONSTRUCTING COMPOSITE INDICATORS:
METHODOLOGY AND USER GUIDE
(Downloadable, Publication date: 22 Aug 2008, Language: English, pdf format, Pages: 160, ISBN: 9789264043466 , 2.6 MB)

Go to: http://composite-indicators.jrc.ec.europa.eu/Handbook.htm

This Handbook aims to provide a guide to the construction and use of composite indicators, for policy-makers, academics, the media and other interested parties. While there are several types of composite indicators, this Handbook is concerned with those which compare and rank country performance in areas such as industrial competitiveness, sustainable development, globalization and innovation. The Handbook aims to contribute to a better understanding of the complexity of composite indicators and to an improvement in the techniques currently used to build them. In particular, it contains a set of technical guidelines that can help constructors of composite indicators to improve the quality of their outputs.

Authors: Michela Nardo, Michaela Saisana, Andrea Saltelli, Stefano Tarantola (European Commission, Joint Research Centre, Applied Statistics and Econometrics Unit)
&
Anders Hoffman and Enrico Giovannini (OECD, Statistics Directorate and the Directorate for Science, Technology and Industry)

Brief description of aims and content
This Handbook does not aim to resolve the debate, but only to contribute to a better understanding of the complexity of composite indicators and to an improvement in the techniques currently used to build them. In particular, it contains a set of technical guidelines that can help builders of composite indicators to improve the quality of their outputs.
The proposal to develop a Handbook was launched at the end of a workshop on composite indicators jointly organised by the JRC and OECD in the spring of 2003 which demonstrated:

• The growing interest in composite indicators in academic circles, the media and among policy-makers;
• The existence of a wide range of methodological approaches to composite indicators, and;
• The need, clearly expressed by participants at the workshop, to have international guidelines in this domain.

Therefore, the JRC and OECD launched a project, open to other institutions, to develop the present Handbook. Key elements of the Handbook were presented at a second workshop, held in Paris in February 2004, while its aims and outline were presented to the OECD Committee on Statistics in June 2004. This version of the Handbook is a revision of the document published in 2005 in the OECD’s statistics working paper series and contains an update of current research in the field.

Table of contents:
INTRODUCTION
-Pros and Cons of Composite Indicators
-Aim of the Handbook
-What's Next

PART I. CONSTRUCTING A COMPOSITE INDICATOR
-1. Steps for Constructing and Composite Indicator
-2. A Quality Framework for Composite Indicators

PART 2. A TOOLBOX FOR CONSTRUCTORS
-3. Imputation of Missing Data
-4. Multivariate Analysis
-5. Normalisation
-6. Weighting and Aggregation
-7. Uncertainty and Sensitivity Analysis
Concluding Remarks

References A
Appendix: Technology Achievement Index
Steps in the construction of composite indicators
The forerunner to The Handbook is the:
State-of-the-art Report on Current Methodologies and Practices for Composite Indicator Development
by Michaela Saisana, Stefano Tarantola (2002) EUR 20408 EN, European Commission-JRC, Italy
[Citations of this report]

The report examines a number of methodologies with a view to clarifying how they relate to the development of composite indicator. Several methods are investigated such as • Aggregation systems • Multiple linear regression models • Principal components analysis and factor analysis • Cronbach alpha • Neutralization of correlation effect • Efficiency frontier • Distance to targets • Experts opinion (budget allocation) • Public opinion and • Analytic Hierarchy Process.

The report further discusses 24 published studies on composite indicators related to environment, economy, research, technology and health, including practices from the Directorates General of the European Commission. For each composite indicator reviewed, the report offers general information on the number and type of sub-indicators, on the preliminary treatment (normalisation, detrending etc.) and on the weighting system considered. The advantages and eventual methodological limitations of these composite indicators are briefly discussed.