The Balassa Index meets the Theil Index - a Decomposition Methodology for Location Studies

This paper focuses on the decomposition of location measures according to a twofold geographical level of analysis. The methodology, based on the use of the Theil dissimilarity index, is potentially applicable to the assessment of the spatial distribution of several economic phenomena when different hierarchical levels of analysis are considered. In the specific case, the entropy index considered is first defined as the weighed average of the log of regional Balassa indices. Thanks to the decomposability typical of the generalised entropy indices, the index constructed allows to disentangle the relative importance of country comparative advantages from regional competitiveness. The decomposition of relative concentration indices provides a rigorous method to quantify the cross-country divergence in localisation from the inner-country agglomeration patterns. Similarly, the construction of specialisation measures is intended to capture the different constituents at the national and sub-national levels. The paper ends with the decomposition of typical entropy obtained condensing relative concentration and relative specialisation into a single index.