An Information Theory Approach to Measuring Industrial Diversification

In: Journal of economic studies, Volume 16, Issue 1

Abstract

It is demonstrated that entropy is a useful measure for examining
industrial diversity either among regions or for a particular region
over time. Using the entropy method, employment diversity indices are
computed for the 50 states and the district of Columbia for the ten‐year
period from 1972 to 1981. Of the 51 study areas, roughly half show high
to moderate diversification, and none are distinguished as either highly
diversified or highly specialised. Furthermore, the entropy measure is
disaggregated into its between‐set and within‐set elements to express
the extent and pattern of dispersal between and within different groups
and subsets of industries in the United States for the 28‐year period
from 1960 to 1987. The US economy is found to be relatively diversified
in terms of employment over the period of study. However, there is a
decreasing contribution of manufacturing and an increasing contribution
of non‐manufacturing to the degree of economic diversification within
the total economy.