RAWAL COMMERCE CLASSES

XI-ECONOMICS (STATISTICS THEORY)

CORRELATION
1. Define correlation?
Correlation is a statistical method or technique that measures quantitative
relationship between two variables like, price and demand.
2. What is meant by partial correlation?
When ·two variab_les move in same ·direction, when one increase the other also
increase and one decrease the other also decrease
(A)Simultaneously increase in the (B) Simultaneously decrease in the
values of both Variables. values of both Variables.
X y . ~ X y
10 100 ~f ' so 200
20 150 ..' 40 150
30 .. 200 ·-.~ ' 30 100
- so - --
40 ,•' _250· 20
3. What is meant by negatJye cc;,rr~lati'on?
When two variables· change·,n d.i fferent directions, rise in one variable with a fall
in other variable. ·
4. What is linear c·orrelation?
I

Linear correlation is said to exist, if amount pf change .in one variable tend::; to
- : ·- . t
bear a constant ratio to the amount bf change in other variable.
5. What is non-~linear correlation?
When two do not change in any constant proportion. Such a relationship does not
form a straight line relationship.
6. What is multiple correlation?
When the relationship among three or more variables is studied simultaneously.
DEGREE O.F CORRELATION
7. What is perfect correlation?
When two variables move in same proportio n . .
(a) Proportio nal change in two variables is in same direction.so coefficien t of
correlatio n is positive. (+l)

Rawal commerce Classes, 1404, Urban Estate Phase 2 Dugri, Ludhiana I 94175-80925, 88376-63263
 (b) Perfect negative- correlation is perfectly negative when pr~po~ional chang~ i
• · · fficient of correlation 1s (-1) 1\
two variables is in opposite direction. coe
8. What is limited degree of correlation?
The degree of correlation between 0 and 1 may be rated as:
(a) HIGH- when correlation of two series is close to 1,its coefficient lies between

0.75 and 1
(b) MODERATE- when correlation of two series is neither large nor small. Its
coefficient lies between 0.25 and 0. 75
(c) Low- when degree of correlation of two series is small, its coefficient lies
between 0 and 0.25
9. What is line of best fit?
Line of best fit is the one that passes through scattered points such that it
represents most of these points.
10. What are methods of correlation?
(a) Scattered diagram me~hod
(b) Karl Pearson's coefficient of correlation
· (c) Spearman's rank correlation
11. What is scattered diagram method?
It offers a graphic expression of dire.ction and degree of correlation.

Graph: Scattered Diagram

1

'1I ,
y y I
__.- .
o...._,__ _ _ _,..,_ ·o...___ _ _ _ __
(A) r=+l X (B) r= - 1 X' (C) X
, (Pt-.rfect Positive) (Per'fec;t Negative) Cf?o~itive)
> •• -,,. ......... ~·

. . .. .
. . . ..
o,____ _ _ _ _...;.....;.,
,o- - - - - - -
(D) Negative · · X (E) No Correlation X

Rawal Commerce Classes, 140.l'., Urban Estate Phase 2 Dugri, Ludhiana I 94175-80925, 88376-63263
 ----
12.Where is method of ,
In situar . Spearman s rank correlation suitable?
ion of finding out I .
Spear , corre at1on between qualitative variables.
rnan s rank meth 0 d .
1s used. There are many methods where quant1t. at1ve
.
rneasu rernen t is t .
. . .
no possible. These variables are called attributes or quahta
vanables. t1ve

l 3.What is significance of correlation?

(a) Formation of laws- study of correlation shows the direction and
degree of
relationship between variables. this helped in formation of economic concep
ts
such as law of demand.
(b) Business decision- correlation facilitates business because th'e trend
path of
one variable suggests changes in other variable.
(c) Policy formulation- correlation analysis heJps in policy formulation.
if the govt.
finds a negative correlation between tax rate and · tax collection, it
should
follow policy of low tax rate.

Rawal Commerce Classes, 1404, Urban Estate Phase 2 Dugri, Ludhiana I 94175-8
0925, 88376-63263
 METHODS or: CORRELATION

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, Rawal Commerce Classes, 1404, Urban Estate Phase 2 Dugri, Ludhiana I 94175-80925, 88376-63263
 INDEX NUMBER
1. What is index number?
.
It is a st t'ist'ica 1device
a for measuring changes in the magnitude of a group of related
variables.
2. What are the problems in construction of index number?
prices
{a) Selection of base year- base year is reference year. it is the year with which
of current year are compared. That is ,it should be the one without much ups and
downs, otherwise the index values will fail to capture the real change in the
variable.
r,
(b) Selection of prices of goods and services- In the construction of index numbe
or
the problem is whether to adopt retail prices or wholesale prices, controiled
open market prices.
(c) Purpose of index number- before constructing index number, one must define
objective. The construction of index ·number is significantly influenced by the
objective or purpose of the study. For
example if the objective is to study the
ct
impact of change in value of money on the consumers, one should constru
consumer CPI.
not
(d) Selection of goods and ·services- to construct CPI, all commodities are
included. It is neither noi possible nor desirable to include all the goods and
services produced .in our country. Those goods and services which represent most
of others in the market.
3. What are advantages or uses if index number?
their
(a) Useful to business community- price index numLer serve as a useful guide in
n.
pl~nning and decisions. Trend of prices significantly influence production decisio
on in
(b) Useful to politicians- politicians come to know of the real economic conditi
of
the country on the basis of index number. They give constructive criticism
govt.'s economic policies and give suggestions for economic reforms.
and
(c) Useful to govt.- With help of index numbers govt. determines its monetary
y.
fiscal policies and takes concrete steps for the economic development of countr
(d) Information regarding foreign trade- Index of exports and imports provide us~ful
are
information regarding foreign trade. So, export and import policies
formulated.

Rawal Commerce Classes, 1404, Urban Estate Phase 2 Dugri, Ludhiana I 94175-8
0925, 88376-63263
4. What are features of index numbers? . •t d f
0
(a) Index numbers are expressed in percentages - The changes m magrn u e_ a
group are expressed in terms of percentages which are independent of units of
measurement. Percentage (%) sign is never used. ·
(b) Measures of relative changes- Index number measures relative or percentage
changes in variable over time. If index of prices stands at 200 in 2014 compared to
100 in 2004-05 (base year) it suggests that compared to base year, prices have
risen by 100%
(c) Index numbers measure the change not capable of direct measurement- Index
numbers are meant to study the changes in the effects of such factors which
cannot be measured directly.
(d) Effect of changes in relation to time or place- index numbers are used to
compare changes which take place over perieds of time, between locations, in
I "'·
categories.
5. Highlight the basic difference between ~ pr~ce index ry.umber and production index
number (Wholesale Price Index)? ,. . . · ,~
/

• Consumer price index reflects,th~,average increase in the cost of commodities

consumed by class of peqple so, they.~an maintain the same standard of living
in the current year as in the base.year.
• Producer price refers to ·the basic price including taxes trade margins and
transportation costs. It m~asures the relative changes in the prices of
commodities traded in the wholesale market.
6. Why fisher's method is considered an ideal method?
• It is based on variable weights.
• It takes into consideration price and quantities of both base year and current
year
• It is based on geometric mean, which is regarded as best method for
calculating index number.
• It satisfies both time reversal test and factor reversal test.
7. What are desirable properties of base year?
• It should be a normal year, not showing wide fluctuations.
• It should not be a year too far from year of study.
• Jt should not be neither very long nor very short period. It should not be more
than a year and not less than month.
I
• It should be a year for which reliable statistical data are available.

Rawal Commerce Classes, 1404, Urban Estate Phase 2 Dugri, Ludhiana I 94175-80925, 88376-63263
 Importance of Co
er Price I d
(a) Measure real nsum
V n ex or Cost of living index.
I of
Rupee ·t a ue- These index number are used to measure real value
Or I s purcha ·
(b) Analy . sing power and real income. d' .
. used for the analysis of market of specific commo ,t,es
SIS of market·· It is
f
or demand and supply.
(c) National In come Deflator: These indices are used as deflator of National Income.
50 real change in National Income is estimated .
rnment to frame policies
(d) Formulation of Price Policy: These are used by the gove
whether the prices are to be
on prices. On the basis of these, Government decides
or PDS system shou ld be
controlled, dual price policy should be adopted
introduced.

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1. Simpl e aggre ga ti ve met hod:

l:P, x 100
l' - -
uo - l:P0

Here, r., = Price index of the curren t year.

in the curren t yea r
:EP, - Sum of the p rices of th e comm odi ties
.
ici; in the ba~<: year .
:£Po = Sum of tho price~ of the com ,,.;odit h ich avem gc ch a nge 1s to be mens urc-d or 111,i..:x
l year is rhc ycnr tor· w
C urren t yea r: C ur(en
~f index numb er is lo be cnlcu latt:d. ng,,·
from ~hich we want m easur e e~ten 1 of .:ha
Dase yea r : B ase year is the year of refere nce y assum ed I 00.
base year 1s gener all
. in rhe curren t year. The ind ex numb er of
:
Simpl e overa ge of price Relat iv es meth od

· ., .j' -
.!lx100-)
---
p ""
N
.
Here,
Pill
= P n. ce .mdex of the curnm l year
I'
,~.
· ! x l OO
= P rice relativ es
N = N um ber o f comm oditie s

2 Dugri, Ludhiana I 94175 -80925, 88376 -63263

Rawal Commerce Classes, 1404, Urban Estate Phase
 --
2. WEIGHTED INDEX NUMBERS
Weighted Aggregative
- - - -- -- -Method
------
___ ............. --• -· · · · · · · ·

p - ~ ) ( 100
Laspeyre's Method 01 - Ipoqo

- - - - - - - - - - - - - - t·····················

Weighted Average of Price Relatives· · .• • • • • • • • • ~-~~ .. ••••••..•• •

Method , ,:1 P01 = - -
R-= (.!L
po
t~J o o1
J
IW ·W ~
- - - - - - - - - - ----+ · •····· ·· · · ····· · ···· ·· · · ········ ·· ·· ·· f· · · · · ··· ·
pt, 'L 0
3. CONSUMER PRICE INDEX (CPI) ,, ~
Aggregate Expenditure Method

. ;
Family Budget Method
. . . IRW
::.,, CPI=-·-
·~ ~w
:: ') .... -

4. INDUSTRIAL PRODUCTION INDEX (IPI.).. .. .

r(i!i_q 1oo)w
0
x

IPI = - - - - -
z.W

• Rawal Commerce Classes, 1404, Urban Estate Phase 2 Dugri, Ludhiana I 9417'5-80925, 88376-63263