ABSTRACT
This chapter begins by tracing the evolution of the composite index from the older diffusion index. The two indexes are shown to differ only in the way they treat the magnitude of movements, with amplitude standardization lying at the heart of composite index construction. The chapter examines the different approaches to amplitude standardization in light of their purpose, their implicit and explicit assumptions, and their adequacy, and suggestions are made for improvements. The issue of amplitude standardization is central to the construction of composite indexes because it arises from the key difference between diffusion indexes and composite indexes. The fact that standardizing a series without detrending can change the existing trend is of little account because in every case the final composite index can be transformed to match any target trend. Reliability and validity are important considerations whenever composites are used in the social sciences.
