CHarTeER Correlation . Correlation analysis is a means In previous chapters you have pearat for examining such relationships how to construct summary measu out eel of is and ch epee! It deals with questions ; * Is there any relationship between two variables? 2015-16STATISTICS FOR ECONOMICS Such examples of relationship may be given a cause and effect interpretation, Baers ty be hat If the value of one variable changes, does the value of the other also change? relationship exist, they are difficult to explain it. In another instance a third variable’s Impact on two variables may give rise to a relation between the two variables. Brisk sale of ice-creams . may be related to higher number of | eels deaths due to drowning. The victims are not drowned due to eating of ice- creams. Rising temperature leads to brisk sale of ice-creams. Moreover, large number of people start going to swimming pools to beat the heat. This might have raised the number of deaths by drowning. Thus temperature is behind the high correlation between the sale of ice-creams and deaths due to drowning, * How strong is the relationship? What Does Correlation Measure? 2. Tyres or RELATIONSHIP Let us look at various types of relationship, asures covariation, not nn causation. Correlation should never beCORRELATION interpreted as implying cause and effect relation. The presence of correlation between two variables X and Y simply means that when the value of one variable is found to change in one direction, the value of the other variable is found to change either in the same direction (i.e. positive change) or in the opposite direction (i.e. negative change), but in a definite way. For simplicity we assume here that the correlation, if it exists, is linear, i.e. the relative movement of the two variables can be represented by drawing a straight line on graph paper. ‘Types of Correlation Correlation is commonly classified.” and positive. correlation. The correlation is Said to” into negative be positive when the variables move 93 3. Tecunigues ror MEASURING CorreELaTION Three important statistical tools used to measure correlation are scatter diagrams, Karl Pearson's coefficient of correlation and Spearman's rank correlation. A scatter diagram visually presents the nature of association without giving any specific numerical value. A numerical measure of linear relationship between two variables is given by Karl Pearson's coefficient of correlation. A relationship is said to be linear if it can be represented by a straight line. Spearman's * coefficient of correlation measures ‘the linear association between ranks assigned to indiviual items according to their attributes. Attributes are those variables which cannot be ~ s together in the soa mption also memericaly measured such as When inc directions. When the in your studies, chances of scoring low marks/grades increase. These are instances of negative correlation. The variables move in opposite direction. telligence of people, physical appearance, honesty, etc. Scatter Diagram A scatter diagram is a useful technique for visually examining the form of relationship, without calculating any numerical value. In this technique, the values of the two variables are plotted as points on a graph paper. From a scatter diagram, one can get a fairly good idea of the nature of relationship. In a scatter diagram the degree of closeness of the scatter points and their overall direction enable us to examine the relation- 2015-1694 ship. If all the points lie on a line, the correlation is perfect and is said to be unity. If the scatter points are widely dispersed around the line, the correlation is low. The correlation is said to be linear if the scatter points lie near a line or on a line. Scatter diagrams spanning over Fig. 7.1 to Fig. 7.5 give us an idea of the relationship between two variables. Fig. 7.1 shows a scatter around an upward rising line indicating the movement of the variables in the same direction. When X rises Y will also rise. This is positive correlation. In Fig. 7.2 the points are found to be scattered around a downward sloping line. This time the variables move in opposite directions. When X rises Y falls and vice versa. This is negative correlation. In Fig.7.3 there is no upward rising or downward sloping line around which the points are scattered. This is an example of no correlation. In Fig. 7.4 and Fig. 7.5 the points are no longer scattered around an upward rising or downward falling line. The points themselves are on the lines. This is referred to as perfect positive correlation and perfect negative correlation respectively. r . on height, weight and scored by students in your class in any two subjects in class X. Draw the scatter diagram of these variables taking two at a time. What type of relationship do you find? ol STATISTICS FOR ECONOMICS jul observation of the scatter eee an idea of the nature and intensity of the relationship. Karl Pearson's Coefficient of Correlation This is also known as product moment correlation and simple correlation coefficient. It gives a precise numerical value of the degree of linear relationship between two variables X and Y. The linear relationship may be given by Y=a+bX This type of relation may be described by a straight line. The intercept that the line makes on the Y-axis is given by aand the slope of the line is given by b. It gives the change in the value of Y for very small change in the value of X. On the other hand, if the. relation cannot be represented by a straight line as in Y= the value of the coefficient will be zero. It clearly shows that zero correlation need not mean absence of any type of relation between the two variables. Let X,, X,, ..., X, be N values of X and Y,, Y, ,..., Yy be the corresponding values of Y. In the subsequent presentations the subscripts indicating the unit are dropped for the sake of simplicity. The arithmetic means of X and Y are defined as poe -2Y N N and their variances are as follows oy = RXR! Ky, N 2015-16 Toa awC ytleltou gz orelation 4h aque om_ A pad se ot td | Uw yt drove ie ya Wr a ginpouriow Ax oY dota or C4 GQ) pi weigh of tote Maks 9| cptuduits @) Price 9| Product are al ee 9 COS Jota > LUA UF \luw RE dined di ae as camjoone Wo ib x - ailto wud \ yonoron re uu TB ee ‘allt ge quociaiet 0% fileesd (pyelahou - — on we out a my Ose? ge coq a ont oe a riceiTer d dese) un Ke tase tain py .o# Woh: oth ) ees Yalut mo Be cs iow eva Ba pee ioe pr(\N Wy 0 8 % Ue dlecreare. 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Bry am Goelte \M hy 6 eee 55 49 BWP GF Go ap Y MI 5 (60 18 [yes 1 5 lis Mo be Fy 26% re N EXE 2H2Y =a PE nye YX = inlgstad= GENE 2 epee fan OS Fyre | 1382 ra oe SM = 3900 afe NExI- EAE ) EX-EXEY ——— pinact Red) _fasyeexy[nae Ey i) x Y gy ee 0 4 b 8) ns es @ 64 256 Fe \ 98 4 b hd My 25 i i 19 ty Mt -" ea y ‘i \0 9 uy \6 2 cue MOI, wa 5 ig we Sse" Tako Soweto i. fa mag I seal sje 1 2dydy ~ 2s eee “paral OP weep 9 Be | are ad Et yy 2 Mody p index nom i i /’ Prana vder X \20 |50 190 =” F 9 a Ao 350A= Assumed Mean —> A deviation, we ———— - ™ 5 elo) B=) 3 helo hi = 160 g y y die hc ae ay dy ¢, a = a an oe aa ae a = Y “a ee lo Q5w Q g g\ jv \Qo B20 oD 2 ) \ 1 oh im ten Benign > ‘ Se" 325 3 313 3%‘ Pind tol fel bho Sia grup ad defed iu Gpaey rom foie doe Sin qrop \\s-6 ey 18 pg, ee i Spe 3 5p poy me ely Q O®Q Ga a bares ln 4 beauty Gonlor OMe Yo, Tey in te fell soe oWwl> ovaby100 The table of transformed variables is as follows: Calculation of rbetween price index and money supply using step deviation method TABLE 7.3 U a 100) ( ¥-1700 ( 10 Y( 100 } Crees 2 1 4 1 2 XU = 41; ZU = 35; DU? = 423; IW?= 3: UV = 378 Substituting these values in formula (3) (2U)(2U) N 7 2 (au) [ve_@¥) N N xUV- ZU? - 41x35. 0-7 5 1423. 5 343. 5 =0.98 The strong positive correlation between price index and money supply is an important premise of monetary policy. When the money supply grows the price index also rises. STATISTICS FOR ECONOMICS g Activity * Using data related to India’s population and national income, calculate the correlation between them using step deviation method. i) Spearman's rank correlation Spearman's rank correlation was developed by the British psychologist CE. Spearman. It is used when the variables cannot be measured dents can be easily ranked in ithout using measuring rods and weighing tions when you Moreover, sometimes “The correlation coefficient between two variables with extreme values may be quite different from the coefficient without the extreme values. Under these circumstances rank correlation provides a better alternative to simple correlation. . Its formula has 2015-16CORRELATION been derived from simple correlation Coefficient where individual values have been replaced by rank: s are” sed for the icutation is coefficient provides measure of linear association between ranks assigned to these units, not their values. = 6xD* where m,, m,, ..., are the number of Sn repetitions of ranks and 1 their corresponding correction factors. This correction is needed for every repeated value of both variables. If three values are repeated, there will be a correction for each value. Every time m, indicates the number of times a value is repeated. All the properties of the simple correlation coefficient are applicable here. Like the Pearsonian Coefficient of correlation it lies between 1 and -1. However, generally it is not as accurate as the ordinary method. This is due the fact that all the information concerning the data is 101 not utilised. The first differences of the values of items in the series, arranged in order of magnitude, are almost never constant. Usually the data cluster around the central values with smaller differences in the middle of the array. If the first differences were constant, then r and r, would give identical results. The first difference is the difference of consecutive values. > Rank correlation is preferred to Pearsonian coefficient when extreme values are present. In general 7, is less than or equal to r. The calculation of rank correlation “will be illustrated under three situations, 1. The ranks are given. 2. The ranks are not given. They have to be worked out from the data. 3... Ranks are repeated. NG 282 uieWhersthesamlesgaresgiven _ Example 3 Five persons are assessed by three Judges in a beauty contest. We have to find out which pair of judges has the nearest approach to common perception of beauty. Competitors Judge 1 2 3 A B ic wasle soala im 2 a4 3 aee There are 3 pairs of judges necessitating calculation of rank correlation thrice. Formula (4) will be used. 2015-16STATISTICS FOR ECONOMICS: wl) n-n The rank correlation between A and Bis calculated ae Student Marks in Marks in Statistics Economics Case 3: When the ranks are repeated Example 5 g pecceigatice in The values of X and Y are given as rel ae lon is 0.5. X 25 45 35 4015 19 35 42 ink correlation Y 55 60 30 3540 42 36 48 a m7 poe oe In order to work out the rank 3 ties ae Paes of correlation, the ranks of the values ae dl st. Judges are worked out. Common ranks are very different tastes. given to the repeated items. The 2015-16