Almost Equi-Marginal Principle Based Composite Index of Globalization: A Study of 118 Countries

Abstract

The present study proposes an alternative method to construct an index of globalization which is based on the principle of almost equi-marginal contributions (AEMC) or Shapley values of the constituent variables to the overall index rather than the correlation coefficients among the constituent variables and the overall index (the KOF index based on the principal component scores). This has been done by minimization of the Euclidean norm of the Shapley values of the constituent variables. As an exercise, secondary time series data (1970-2014) on the measures of globalization in 118 (economic, social and political) economies (for which KOF data on different dimensions of globalization are available for all the years 1970-2014) have been used. A comparison of the AEMC index with the KOF index reveals that the AEMC index is more sensitive than the KOF index of globalization. Both indices capture the trends in globalization in the countries under study and are highly correlated (r=0.99) between themselves. Thus, AEMC is an alternative or perhaps a better method to construct composite indices.