Correlation

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 What is Correlation?

A statistical tool that helps in the study of the relationship between two variables is known as Correlation. It also helps in understanding the economic behaviour of the variables.


According to A.M. Tuttle, "Correlation is an analysis of covariation between two or more variables."

Significance of Correlation

It helps determine the degree of correlation between the two variables in a single figure.

It makes understanding of economic behaviour easier and identifies critical variables that are significant.

When two variables are correlated, the value of one variable can be estimated using the value of the other. This is performed with the regression coefficients.

In the business world, correlation helps in taking decisions. The correlation helps in making predictions which helps in reducing uncertainty. It is so because the predictions based on correlation are probably reliable and close to reality

What is a Scatter Diagram?

A simple and attractive method of measuring correlation by diagrammatically representing bivariate distribution for determination of the nature of the correlation between the variables is known as the Scatter Diagram Method. This method gives the investigator/analyst a visual idea of the nature of the association between the two variables. It is the simplest method of studying the relationship between two variables as there is no need to calculate any numerical value. 


1. Positive Correlation:

When two variables move in the same direction; i.e., when one increases the other also increases and vice-versa, then such a relation is called a Positive Correlation. For example, Relationship between the price and supply, income and expenditure, height and weight, etc.

Schedule for positive correlation

Price in ₹ Quantity supplied in units

1                          2

2                                 4

3                                 6

4                                     8

2. Negative Correlation:

When two variables move in opposite directions; i.e., when one increases the other decreases, and vice-versa, then such a relation is called a Negative Correlation. For example, the relationship between the price and demand, temperature and sale of woollen garments, etc.


Schedule for Negative Correlation


X                         Y

1                                 5

2                                        4

3                                     3        

4                          2

5                                            1

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Based on the ratio of variations between the variables, correlation can be classified as:

1. Linear Correlation:

When there is a constant change in the amount of one variable due to a change in another variable, it is known as Linear Correlation. This term is used when two variables change in the same ratio. If two variables that change in a fixed proportion are displayed on graph paper, a straight- line will be used to represent the relationship between them. As a result, it suggests a linear relationship.














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