Weighted Composite Diversification Index: A New Measure of Economic Diversification in Resource-Dependent Economies

Abstract

This note introduces a Weighted Composite Diversification Index (WCDI) for resource-dependent economies that integrates fiscal, trade, and output diversification into a single measure, weighted by their relative economic size. Unlike existing indices, the WCDI endogenizes weights according to the macroeconomic structure: fiscal diversification is weighted by government size, trade diversification by export dependence, and output diversification by domestic demand as a share of GDP. To reflect the vulnerabilities of resource-dependent economies, the WCDI incorporates a penalty term that penalizes resource shares within each subindex, providing a context-sensitive gauge of diversification