Comparative Position in the World

The procedure followed for the design of this Heat Map is as follows:

• We establish the average annual value for each subset of countries (developed or emerging and developing) in each of the 21 variables used in the FRDP Indicators. We also calculate 0.75 and 1.5 standard deviations (SD) of the values for these variables. Barring data unavailability, there are 26 values for developed economies and 34 for emerging and developing economies. The cost points set (0.75 and 1.5) have been selected, after successive tests, to capture reasonably significant, on the one hand, or very significant, on the other hand, deviations from similar economies. Values close to the averages of the group of countries themselves are considered not to be significant in our procedure.
• For each variable, we assign a 0 if the value for the economy under analysis deviates less than 0.75 SD from the calculated average, either in the positive or negative direction. We assign a +1 (+2) if the economy is favourably diverted between 0.75 and 1.5 (more than 1.5) SD of their group average. Symmetrically, we assign a -1 (-2)If the economy under analysis deviates unfavourably between 0.75 and 1.5 (more than 1.5) SD of their group average.
• The results for each variable are aggregated (between -2 and +2) for the five variables of each indicator, giving a Final Result that ranges between -10 and +10.
• This process is carried out for each year and by equating the five variables of each indicator.
• Taking the annual result or averaging that of different years, as desired, the Final Result is transferred to the Heat Map, in which colours are established to reflect the deviations from the average of the corresponding type of economy. Grey tones show a country exactly at or very close to the average of its economy type. The green colour indicates economies with significant positive deviations (the more favourable their situation with respect to the average). Meanwhile, the pink colour reveals significant negative deviations (higher the more unfavourable their situation is compared to the average).

• Note that those economies are being highlighted on the Heat Map that, in the framework of an Indicator, are showing repeated deviations (positive or negative) that are not compensated by deviations in the opposite direction or more than one very significant deviation. Thus, for example, even an exceptionally negative value (more than 1.5 standard deviations) in one of the five variables of an indicator would not lead the country to a "negative colour" (it would mean a -2, which we keep within the neutral level - shades of grey - for that indicator). Similarly, two moderately positive deviations among the five variables of the indicator would not be sufficient for a "positive colour" assignment, a grey tone would be maintained.
• In general, the procedure described so far applies equally to each of the 16 variables on which three of the FRDP Indicators are built.[1]The indicators of Growth Dynamics, Institutional Quality and Debt Dynamics (five variables per indicator, with the difference in the last three where, due to different data availability, long-term interest rates for developed countries and external debt for emerging and developing countries are considered).
• In contrast, the following nuances should be considered for the Monetary and External Sector Dynamics Indicator:
  • The variable "Monetary authority's reference interest rate" is excluded from the procedure, as it is not feasible to establish that a higher or lower value of this variable is more or less favourable for the economy. It will depend entirely on the conditions, in particular but not only inflation, of the economy.
  • With regard to the "inflation rate", a deviation in the range 0-2.5% of annual inflation for developed countries would not be assessed as adverse (for emerging and developing countries, a value in this range is always a positive or very positive deviation from the average).
  • With respect to the "current account balance to GDP" variable, the deviations are not the average of the economies in each subset, but rather the deviations from zero, with the positions closest to equilibrium being considered more favourable and those furthest from equilibrium more unfavourable, whether it is a deficit or a surplus. Although the first of the two positions tends to have more unfavourable implications if it persists in the medium and long term, this Indicator gives priority to equilibrium.
  • In the same vein, the variable "exchange rate stability" indicates that very sharp appreciation or depreciation processes are equally adverse, with exchange rate stability with respect to the set of trading partners taking precedence (in other words, the scales are based on the absolute value of the annual exchange rate movements of the economies of each subgroup).
  • Finally, with respect to the "openness to the outside world" variable, the coefficient of external openness, used as a concrete indicator of openness to the outside world, is corrected for economies significantly larger (smaller) than the average.[2] of its peer group, since the availability (absence) of a large domestic market almost inevitably leads to less (more) openness of that economy to the outside world.

[1] See the Introductory Document to the FRP IEO for details of variables and indicators.

[2] Using the average population of the last five years of data as a benchmark, the average for the selected developed economies is 40 million, rising to 155 million for the emerging and developing countries included.