An Alternative Aggregation Process for Composite Indexes: An Application to the Heritage Foundation Economic Freedom Index

Composite indices of economic freedom may constitute a useful and practical guide and a significant source of information for experts in government policy, investors and market researchers across the world. Their high applicability and the important consequences of the relative position of the countries in a ranking of economic freedom, has led many practitioners and academic researchers to open a debate about some methodological aspects in the construction of these indices. In this paper, we will focus on the aggregation and normalization processes used to build the composite indicator, and we will make user of the data of the index of economic freedom published by the Heritage Foundation. In particular, we will propose a different more general and rich aggregation and normalization approach based on the Multiple Reference Point method. Rather than just providing a ranking, the resulting composite indicators will be able to show overall and particular strengths and weaknesses of the countries in terms of their economic freedom enriching therefore, the information provided by other indexes of economic freedom. Both, numerical scores and their correspondent graphical representation give the decision maker a full and detailed picture of the situation of the countries, informing in addition about the relative performance of the country with respect to other countries.