Once the different variables in the index have been normalised, they have to be ‘added together’ to generate the index. At this point, there are two alternatives.

First, the index can be constructed by taking a simple average of the variables. This is straightforward, but of course imposes the assumption that all variables entering the index are equally important.

Second, the index can be constructed by taking a weighted average of the variables, where the weights are positive and add up to one. There are then two ways of assigning the weights.

First, the weights can be subjective, i.e. chosen by the researcher according to his/her subjective belief about which variables are more important. This is the approach taken by Foreign Policy and A.T.Kearney in the construction of their Globalisation Index. In fact, in the latest version of their index,  they double-weight  FDI flows, as they believe  that this is a particularly important indicator of globalisation.

Second, the weights can be chosen to maximise the informativeness of the index: statistically optimal weights. We take the second approach, as we feel this avoids any subjective bias on the part of the researcher as to which weights are important.

Briefly, statistically optimal weighting (or principal component weighting, as it is more properly known) works as follows (if you want to know more, see the Appendix!). Take for example, the four variables that make up the economic globalisation index. In 2000, these were available for 119 countries. Thus, in 2000, we are using 119x4 pieces of information. When we aggregate these four variables to make the index, we end up with only one piece of information about each country: thus we are ‘throwing away’ 119x3 pieces of information. Statistically optimal weighting ensures that when we do this, we retain as much as possible of the original information about the countries.

The statistically optimal weights used in the construction of our index are: 

Table 3

Sub-Index	Variables	Weight
Economic Globalisation	Trade	0.418
	Fdi	0.092
	Portfolio	0.220
	Income	0.270
Social Globalisation	People	0.331
	Foreign Stock	0.266
	Foreign Flow	0.629
	Worker Remittances	0.079
	Tourists	0.026
	Ideas	0.669
	Phone calls	0.004
	Internet users	0.303
	Films	0.061
	Books and newspapers	0.577
	Mail	0.054
Political Globalisation	Embassies	0.378
	UN Peace Missions	0.357
	International Organisations	0.266