Correlation

Definition: Whenever some definite connection exists between the two or more groups, classes
or series or data there is said to be correlation.

What is Correlation?

In is a statistical method or a statistical technique that measures quantitative relationship between

different variables like between price and demand.

Positive and Negative Correlation

1. Positive Correlation: When two variables move in the same direction, that is, when one
increases the other also increases and when one decreases the other also decreases. Such a
relation is called positive correlation. For e.g. relationship between price and supply.

2. Negative Correlation: When two variables change in different directions that is, when one
variable increases the other decreases and when one decreases the other variable increases. For
e.g. relationship between price and demand.

Linear and Non-Linear Correlation

1. Linear Correlation: When two variable change in a constant proportion, it is called linear
correlation. Such a relationship implies a straight-line relationship.

(a) 2 4 6 8 10 12 14
(b) 5 10 15 20 25 30 35

2. Non-Linear Correlation: When the two variables do not change in any constant proportion, the
relationship is 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 relationship between two variables only. Like the
relationship between price and demand.

2. Multiple Correlation: When the relationship between three or more than three variables is
studied simultaneously, it is called multiple correlation. For instance, relation between income,
saving and investment.

Degree of Correlation

It refers to the Coefficient of Correlation. There can be the following degrees of positive and
negative correlation.

1. Perfect Correlation: When two variable change in the same proportion, it is called perfect
correlation. It may be of two kinds:

a) Perfect Positive: Correlation is perfectly positive when proportional change in two variables is
in the same direction. Coefficient of correlation is positive (+1).
b) Perfect Negative: Correlation is perfectly negative when proportional change in two variables
is in the opposite direction. Coefficient of correlation is negative (-1).

2. Absence of Correlation: If there is no relation between two variables, that is, change in one
has no effect on the change in other, then those series or variables lack any correlation between
them.

3. 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:

a) 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.
b) 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.
c) Low: When the degree of correlation of two series is very small, it is called low degree of
correlation. Its coefficient lies between 0 and 0.25.
Note: All the degrees of correlations may be positive or negative.

Degrees 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

1. Scattered Diagram Method

2. Karl Pearson’s Coefficient of Correlation
3. Spearman’s Rank Correlation of Coefficient

Scattered Diagram Method

Scattered diagram offers a graphic expression of the direction and degree of correlation. To make
a 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 variables. Closeness of the dots
towards each other in a particular direction indicates higher degree of correlation. If the dots are
scattered showing neither the closeness nor any direction, it is an indication of low degree of
correlation.

r = +1 (Perfect Positive) r = -1 (Perfect Negative)

Positive Correlation Negative Correlation

No Correlation
Karl Pearson’s Coefficient of Correlation

Scattered diagram method of correlation merely indicates the direction of correlation but not its
precise magnitude. Karl Pearson 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’.

Ʃ𝑥𝑦
r= Here, 𝑥 = (X - 𝑋̅) ; 𝑦 = (Y − 𝑌̅ )
√Ʃ𝑥 2 X Ʃ𝑦 2

Properties of Correlation Coefficient

1. r has no unit. It is a pure number. It means unit of measurement are not parts of r.

2. A negative value of r indicates an inverse relation and if r is positive, the two variables move

in the same direction.

3. If r = 0, the two variables are uncorrelated. There is no linear relation between them.

However, other types of relation may be there.

4. If r = 1 or r = -1, the correlation is perfect or proportionate. A high value of r indicates

strong linear relationship, i.e., +1 or -1.

5. The value of the correlation coefficient lies between minus one and plus one, i.e., -1 ≤ r ≤ +1.

If the value of r lies outside this range, it indicates error in calculation.