Version November , 2003 On the Methodological Foundations of Composite Indicators Used for Ranking Countries

Composite indicators are very common in economic and business statistics for benchmarking the mutual and relative progress of countries in a variety of policy domains such as industrial competitiveness, sustainable development, globalisation and innovation. As a consequence, improvements in the way these indicators are constructed and used seem to be a very important research issue from both the theoretical and operational points of view. This paper starts with an analysis of the axiomatic system underlying the mathematical modelling used to construct composite indicators. Since theoretical inconsistencies are found, a new mathematical aggregation convention is developed for composite indicators aimed at ranking countries. Main features of the proposed approach are (i) the axiomatic system is made completely explicit, and (ii) the sources of technical uncertainty and imprecise assessment are reduced to the minimum possible degree. Along the whole paper, concepts mainly coming from measurement theory, multi-criteria decision analysis and social choice are used.

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