Business economists attempting to determine and to describe the changes in the business activity of metropolitan areas and other geographic sections are seriously limited in their work by the absence of a satisfactory Overall Business Activity Index (OBAI). Although there are several methods for constructing such a composite index, this thesis examines the application of factor analysis to the construction of an OBAI. The difficulty of applying this statistical technique has been in developing a set of weights for combining the extracted factors into an OBAI. Among the objectives of such an overall index are that it should preserve the uniqueness of the component factors and should retain the variance extracted by factor analysis. It was found that weights equal to the square root of the percent of common variance for each factor satisfy these objectives.
An overall index of business activity was constructed from eight constituent series employed by the University of New Mexico's Bureau of Business Research in their Index of Business Activity for New Mexico. The resulting OBAI was evaluated against the Bureau's Index and a verbal description of New Mexico's business activity. It was concluded that the index constructed by the factor analysis method was a satisfactory indicator of change in business activity. In constructing and evaluating such a composite index, the lack of a clear definition of what constitutes business activity and of an objective basis for selecting the component series seriously limits an investigator. With these limitations, factor analysis offers a definite improvement over existing methods of combining a heterogeneous set of local time series into a· unique index of an area's business activity.
Master of Business Administration (MBA)
Level of Degree
Anderson School of Management
First Committee Member
William Stanley Peters
Second Committee Member
Charles S. Telly
Third Committee Member
Ralph Lemon Edgel
Butler, Jay Quigley. "An Application Of The Factor Analytic Approach To The Construction Of An Overall Business Activity Index.." (1969). https://digitalrepository.unm.edu/anderson_etds/39