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Weighting Method for Developing Composite Indices. Application for Measuring Sectoral Specialization
Keywords
Weighting method, determining weights, composite index, PCA, no independent variable, sectoral specialization, Arts, entertainment and recreation
Abstract
When building a composite index, one might desire attributing different weights to factors whose influence it aggregates. Deciding on what weight to allocate to each factor may prove to be a difficult task if there is no possibility of finding an independent variable for the construct one tries to quantify. The present paper proposes a twist in using Principal Component Analysis as means for determining the weights of multiple factors based on which an index may be created. One example where finding an independent variable is not an option might be: developing an index for measuring sectoral specialization. Although over the years several instruments for measuring this construct have been developed, there is still no unanimous and universally accepted way of quantifying sectoral specialization and this paper designs a new index for measuring it by applying the weighting method advanced herein.