01 397202 048 8035282141 16102020 084920pm

ECONOMETRICS
Assignment 1
Submitted To: Dr. Abdul Sattar
Submitted By: Sumia Anwar
Enrollment No: 01-397202-048
Bahria University Islamabad Campus

Q No 1: What is the difference between regression & correlation analysis?
REGRESSION & CORRELATION ANALYSIS
Correlation and Regression are the two analysis based on multivariate distribution. A
multivariate distribution is described as a distribution of multiple variables. Correlation is
described as the analysis which lets us know the association or the absence of the relationship
between two variables ‘x’ and ‘y’. On the other end, Regression analysis, predicts the value of
the dependent variable based on the known value of the independent variable, assuming that
average mathematical relationship between two or more variables.
REGRESSION ANALYSIS:
Definition: Regression analysis is a set of statistical methods used for the estimation of
relationships between a dependent variable and one or more independent variables. It can be
utilized to assess the strength of the relationship between variables and for modeling the future
relationship between them.
Types of Regression Analysis: There are two types of regression analysis
Linear Regression Analysis: Simple linear regression is a model that assesses the relationship
between a dependent variable and an independent variable. The simple linear model is expressed
using the following equation:
Y = a + bX + ϵ
Where:
 Y – Dependent variable
 X – Independent (explanatory) variable
 a – Intercept
 b – Slope
 ϵ – Residual (error)
Multiple Regression Analysis: Multiple linear regression analysis is essentially similar to the
simple linear model, with the exception that multiple independent variables are used in the
model. The mathematical representation of multiple linear regression is:
Y = a + bX1 + cX2 + dX3 + ϵ
Where:
 Y – Dependent variable
 X1, X2, X3 – Independent (explanatory) variables
 a – Intercept
 b, c, d – Slopes
 ϵ – Residual (error)
CORRELATION ANALYSIS:
Definition: Correlation is used to test relationships between quantitative variables or categorical
variables. In other words, it’s a measure of how things are related. The study of how variables
are correlated is called correlation analysis.
Types of Correlation Analysis: Correlation analysis can have three possible results. These are
as follows:
Positive correlation: A positive correlation is a relationship between two variables in which
both variables move in the same direction. Therefore, when one variable increases as the other
variable increases, or one variable decreases while the other decreases. An example of positive
correlation would be height and weight. Taller people tend to be heavier.
Negative correlation: A negative correlation is a relationship between two variables in which an
increase in one variable is associated with a decrease in the other. An example of negative
correlation would be height above sea level and temperature. As you climb the mountain
(increase in height) it gets colder (decrease in temperature).
Zero correlation: A zero correlation exists when there is no relationship between two variables.
For example there is no relationship between the amount of tea drunk and level of intelligence.
KEY DIFFERENCE BETWEEN THE CORRELATION AND REGRESSION

ANALYSIS:
Correlation and regression analysis are both statistical tools, but have different objectives.
Difference between the m can be understood by below mention points:
 A statistical measure which determines the co-relationship or association of two
quantities is known as Correlation. Regression describes how an independent variable is
numerically related to the dependent variable.
 Correlation is used to represent the linear relationship between two variables. On the
contrary, regression is used to fit the best line and estimate one variable on the basis of
another variable.
 In correlation, there is no difference between dependent and independent variables i.e.
correlation between x and y is similar to y and x. Conversely, the regression of y on x is
different from x on y.
 Correlation indicates the strength of association between variables. As opposed to,
regression reflects the impact of the unit change in the independent variable on the
dependent variable.
 Correlation aims at finding a numerical value that expresses the relationship between
variables. Unlike regression whose goal is to predict values of the random variable on the
basis of the values of fixed variable.
Q No 2: What are the Fundamental terminologies of Econometrics?
Independent variable:
The independent variable is the variable the experimenter changes or controls and is assumed to
have a direct effect on the dependent variable. Independent variables are also called regressors,
controlled variable, manipulated variable, explanatory variable, the independent variables are
called as such because independent variables predict or forecast the values of the dependent
variable in the model. It has an ability to explain the dependent variable.
Dependent variable:
The dependent variable is the variable being tested and measured in an experiment, and is
'dependent' on the independent variable. Dependent variables are often referred to as the
predicted variable dependent variables are also called response variable, regressand, measured
variable, responding variable, explained variable and outcome variable. They are explained by
the independent variable
Example:
If one wants to estimate the cost of living of an individual, then the factors such as salary, age,
marital status, etc. are independent variables, while the cost of living of a person is highly
dependent on such factors. Therefore, they are designated as the dependent variable.

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ECONOMETRICS

Submitted To: Dr. Abdul Sattar

Submitted By: Sumia Anwar

Enrollment No: 01-397202-048

Bahria University Islamabad Campus

KEY DIFFERENCE BETWEEN THE CORRELATION AND REGRESSION

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