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Correlation Analysis: -
1. Meaning of correlation : It studies and measures the intensity of relationship
between two or more variables. If the two variables, X and Y change vary in
such a way that with a change in value of one variable the values of the other
variable also change, then they are said to be correlated.
2. Significance of correlation: correlation has immense utility in statistics.
i. It helps in determining the degree of relationship between variables.
ii. We can estimate the value of one variable on the basis of the value of
another variable correlation serves the basis of regression.
iii. Correlation is useful for economists. An economist specifies the relationship
between different variables like demand and supply, money supply and
price level by way of the correlation.
3. Correlation and causation: It measures co-variation, not causation. It should
never be interpreted as implying cause and effect relationship between two
variables. The presence of correlation between two variables X and Y simply
means that when one variable is found to change in one direction, the value of
the other variable is found to change either in same direction or in the opposite
direction.
4. Positive and Negative Correlation :-

Correlation is classified into positive and negative correlation when two

variables move in the same direction, i.e. if the value of Y increases or
decreases with an increase or decrease in the value of X, they are said to be
positively related. On the other hand when two variables move in the opposite
direction i.e. if the value of variable ‘X’ increase or decrease with the decrease
or increase in the value of Y variable, they one said to be negatively correlated.
5. Linear and Non- linear correlation:-

Correlation may be linear or non-linear . If the amount of change in one variable

tends to have a constant relation with the amount of change in the other
variable then the correlation is said to be liner. It is represented by a straight
line. On the otherhand if the amount of change in one variable does not have
constant proportional relationship to the amount of change in the other
variable, then the correlation is said to be non-linear or curvi-linear.

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6. Simple , multiple and partial correlation :-

Correlation may also be simple, multiple and partial correlation. When two
variables are studied to determine correlation, it is called simple correlation on
the other hand when more than two variables are studied to determine the
correlation it is called multiple correlation. When correlation of only two variables
is studied keeping other variables constant, it is called partial correlation.
7. Methods of studying correlation :- The correlation between the two variables
can be determined by the following three methods:-
a Scatter diagram
b Karl Pearson’s method of correlation coefficient
c Spearman’s method of Rank correlation.
8. Scatter Diagram: It is a graphic or visual method of studying correlation. To
construct a scatter diagram, x. variable is taken on X axis and Y Variable is taken
on Y-axis. The cluster of points so plotted is referred to as a scatter diagram. In a
scatter diagram, the degree of closeness of scatter points and their overall
direction gives us an idea of the nature of the relationship:-
i If the dots move from left to the right upwards, correlation is said to be
positive where as the movements of dots from left to right downward
indicates negative correlation.
ii Dots in a straight line indicate perfect correlation.
iii Scattered dots indicate no-correlation. The following diagrams illustrate
the idea:-
iv Dots falling close to each other in a straight line indicate high degree of
correlation.
ia Y ib Y

O X O X
Positive correlation Negative correlation

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ii a Y ii b Y

O X O X
Perfect Positive correlation Perfect Negative correlation

iii Y

O X
No correlation

9 Karl pearson’s coefficient of correlation:- Karl pearson’s coefficient of correlation

is an important and widely used method of studying correlation. Karl pearson
has measured the degree of relationship between the two variables with help of
correlation coefficient. Coefficient of correlation measures the degree of
relationship between the two variables.

Computation of Karl pearsons coefficient of correlation :- The various formulae used

to calculate coefficient of correlation r are : -

i When deviations are taken from mean

r
 XY
 X 2 . Y 2
The formula is also expressed as :

r
 X – X Y –Y

 Y–Y
2 2
X–X

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ii When deviations are taken from assumed mean

N   dxdy –  dx .  dy
r
N . dx 2 –  dx N .  dy 2 –  dy
2 2

where dx = X –Ax, dy = Y – Ay.

iii When step deviations are taken

N   dx' dy ' –  dx'.  dy '

r
N . dx'2 –  dx' N .  dy '2 –  dy'
2 2

dx dy
Where dx'  , dy ' 
ix iy

iv When actual data is used product moment correlation-Direct method

N   xy –  x .  y
r
N . x 2 – x N. y2 – y
2 2

10. Properties of coefficient of correlation :- some of the important properties of

karl- pearson’s coefficient of correlation are : -
i The correlation coefficient is independent of the units of measurement of
the variables:-
ii The value of co-relation coefficientr lies between +1 and -1.
iii The correlation coefficient is independent of the choice of both origin and
scale of observations.
iv The correlation coefficient of the variables x and y is symmetric,
i.e; rxy  ryx .
11. Advantages of karl Pearson’s method:-

Karl person’s method assumes a linear relationship between two variables x

and y. If r = 0, it simply means there is no linear correlation between x and y.
There may exist quadratic or cubic relationship between x and y. The most
important advantage of this method is that it gives an idea about co-variation
of the values of two variables and also indicates the direction of such
relationships.
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12. Rank Correlation :- Charles Edward spearman evolved another method of

finding out correlation between different qualitative attributes of a variable.
This is known, as rank correlation coefficient. When a group of individuals are
arranged according to their degree of possession of a character say, beauty,
intelligence etc, they are said to be ranked. Spearman’s formula for ranks
correlation coefficient in as follows:-

A When Ranks are not repeated :-

6 D 2
R 1 –
N3 – N

B When Ranks are repeated

 1 
6  D 2  M 3 – M  ........
R 1 –  
12
3
N –N
Where D = Difference between the ranks of the two series and

N = number of individuals in each series.

13. The most important advantage of rank correlation method is that it can be
used when quantitative measurement is not possible.

Important Questions :-

1 What is correlation?

2 When are the two variables said to be in perfect correlation?

3 Define karl- Pearson’s coefficient of correlation

4 Mention any two properties of karl Pearson’s coefficient of correlation.

5 Define covariance ?

6 Can simple correlation coefficient measure any type of relationship?

7 What is the difference between liner and non-liner correlation?

8 What is scatter Diagram method and how is it useful in the study of

correlation ?

9 State the merits of Spear Man’s Rank - Correlation ?

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10 Name various methods of studying correlation. Describe any one.

11 Draw a scat ter Diagram and indicate the nature of correlation

X 10 20 30 40 50 60 70 80

Y 5 10 15 20 25 30 35 40

12 C o m p u t e k a r l Person’s coefficient of correlation from the following data.

Marks in Economics 15 18 21 24 27

Marks in Business Studies 25 25 27 31 32

13 Calculate karl- person’s coefficient of correlation between the two variable

x and y and interpret the result.

X 24 26 32 33 35 30

Y 15 20 22 24 27 24

14 Calculate the Coefficient of Spear Man’s rank correlation from the given
data : -

X: 20 10 70 60 45 29 50

Y: 60 63 26 35 43 59 37

15 Calculate coefficient of rank correlation from the following data:-

X: 48 33 40 9 16 16 65 24 16 27

Y: 13 13 24 6 15 4 20 9 6 19

Index Numbers : -

MEANING OF INDEX NUMBERS : -

Index numbers are devices which measure the change in the level of a phenomenon
with respect to time, geographical location or some other characteristic. An index
number is a statistical device for measuring changes in the magnitude of a group of
related variables. It is a measure of the average change in a group of related variables
over two different situations.
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