CORRELATION

Correlation

• Introduction:- In the previous chapter we have learnt how

to construct summary measures out of a mass of data and
changes among similar variables.
• Now we will learn how to examine the relationship between
two variables.
• As a summer heat rises, hill stations, are crowed with more and
more visitors. Ice cream sales become more brisk.
• Thus , the temperature is related to number of visitors and sale of
 Definition of
correlation
• Correlation analysis studies the relation between two are more
variables.
• It deals with questions such as:
• Is there any relationship between two variables?
• It the value of one variable changes, does the value of the other also
changes?
• Do both the variables move in the same direction?
• How strong is the relationship?
 What does correlation
measures?
• Correlation studies and measures the direction and intensity of relationship among
variables.
• Correlation measures covariation, not causation.
• Correlation should never be interpretated 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
other variable is found to change either in same direction(ie positive change) or in
the opposite direction(ie negative change)
 Types of
correlation
• Positive correlation:-
• When two variable move in the same direction, that is, when one increases
the other also increases and when one decreases the other also decreases.
X Y
10 100
20 150
30 200
40 250
 Types of
Correlation
Negative correlation –
• When two variables changes in different directions, it is called negative
correlation. Relationship between price and demand
Price Demand
1 40
2 30
3 20
4 10
 Linear and Non-Linear
Correlation
Linear Correlation:-
• When two variables change in a constant proportion, it is called linear
correlation.
• If two sets of data bearing fixed proportion to each other are shown on a
graph paper, their relationship will be indicated by a straight line.
• Thus linear correlation implies a straight line relationship.
(a) 2 4 6 8 10 12 14
(b) 5 10 15 20 25 30 35
 Linear and Non-Linear
Correlation
Non – linear Correlation
• When the two variables do not change any constant proportion, the
relationship said to be non linear.
• Such a relationship does not form a straight line relationship.
(a) 2 4 6 8 10 12 14
(b) 3 7 12 18 25 35 45
 Simple and Multiple
Correlation
1. Simple Correlation
• It implies the study of two variables only. Like the relationship between price and
demand.
• In law of demand , price is independent variable and demand is dependent
variable
2. Multiple Correlation
• When the relationship among three or more than three variables is studied
simultaneously, it is called multiple correlation.
• In case of such correlation the entire set of independent and dependent variables is
simultaneously studied.
 Degrees of
Correlation
• Degree of Correlation refers to the Coefficient of correlation (r) .
• Perfect correlation: When two variables are changes in the same proportion it
is called perfect correlation. It may be two kinds:
(i) Perfect Positive:- Correlation is perfectly positive when proportional change in
two variables is in the same direction.
• In this case, Coefficient of correlation is positive(+1)
(ii) Perfect Negative :- Correlation is perfectly negative when proportional change in
two variables is in the opposite direction.
• In this case, Coefficient of correlation is negative(+1)
 Degrees of
Correlation
• Absence of correlation :- If there is no relation between two series or
variables, that is, change in one has no effect on the change in other, than
those series and variables lack any correlation between them.
• Limited Degree of Correlation :- Between perfect correlation and absence
of correlation there is a situation of limited degree of correlation.
• In real life, one mostly finds limited degree of correlation.
• Its coefficient(r) is more than zero and less than one(r>0 but <1).
The degree of correlation between 0 and 1
may be rated as
• High: When correlation of two series is close to one, it is called high degree
of correlation. Its coefficient lies between 0.75 and 1.
• Moderate: When correlation of two series is neither large nor small, it is
called moderate degree of correlation. Its coefficient lies between 0.25 and
0.75.
• Low: When correlation of two series is very small, it is called low degree of
correlation. Its coefficient lies between 0 and 0.25.
 Degree of
Correlation
Degree Positive Negative
Perfect +1 -1
High Between +0.75 and +1 Between -0.75 and -1
Moderate Between +0.25 and +0.75 Between -0.25 and -0.75

Low Between 0 and +0.25 Between 0 and -0.25

Zero 0 0
 Methods of estimating
correlation
• Scattered Diagram Method.
• Karl Pearson’s Coefficient of correlation.
• Spearman Rank Correlation X deleted
 Scattered
Diagram
• To make scattered diagram, data are plotted on a graph paper. A dot is
marked for each value. The course of these dots would indicate direction and
closeness of the variable.
 Karl Pearson’s Coefficient of
Correlation
• Karl Pearson's has given a quantitative method of calculating correlation. It is
an important and widely used method of studying correlation .
• Karl Pearson’s Coefficient of Correlation is generally written as ‘r’
Numerical by direct
method
Short-cut method
Numerical on Short-cut method
Step-deviation method
 Numerical on Step-deviation
Method
Calculate the coefficient of Correlation between the price and quanitiy
demanded-

Price (Rs.) 5 10 15 20 25
Demand(kg) 40 35 30 25 20
 Properties of Correlation
Coefficient
 ‘r’ has no units. It is a pure number.
 A negative value of r indicates an inverse relation, and if r is positive, the two
variables moves in a same direction.
 If r = 0, the two variables are uncorrelated. There is no linear
relationship between them.
 If r = 1 or r = -1, the correlation is perfect or proportionate.
 The value of correlation coefficient lies between -1 and +1 ie -1< r<
+1.
 Spearman’s Rank Correlation
Coefficient
• In 1904, Charles Edward Spearman developed a formula to calculate,
coefficient of correlation of qualitative variables.
• It is popularly known as Spearman’s Rank Difference Formula or
Method.
• There are some variables whose qualitative measurement is not
possible.
• These variables are known as qualitative variables such as beauty, bravery,
wisdom, ability, virtue, etc.
FORMULA
 Rank correlation in three different situations

i) When Ranks are given

ii) When Ranks are not given.
iii)When the values of the series are the same.
When ranks are
given
When Ranks are not
given
When the values of the series are the
same
Numerical
 Importance of
correlation
• Formation of laws and concepts.
• Cause and Effect relationship
• Business Decisions
• Policy formulation