A Project Report on

Applications of Correlation in Economics

 Table of Contents
1. Introduction
2. Purpose
3. Measures of Associations

3.1. Covariance

3.2. Correlation

3.2.1. Introduction

3.2.2. History

3.2.3. Types of Correlation

3.2.4. Methods of Determining Correlation

3.2.5. Interpretation of Correlation Coefficient

3.2.6. Properties of Correlation

4. Applications of Correlation in Economics

5. Application Case Studies

5.1. Case Study 1: Jobless Rate and Delinquent Loan Rate in USA

5.2. Case Study 2: Effect of COVID19 in India

5.3. Case Study 3: Economic Recovery Due to Timely Stringent Lockdown

5.4. Case Study 4: Measure of Inflation Which Reflected Economic Activity Better in
2020-21

6. Conclusion
7. References
1. Introduction

Economics is the nexus and engine that runs society, affecting societal well-being,
raising standards of living when economies prosper or lowering citizens through class
structures when economies perform poorly. From a household budget to international trade,
economics ranges from the micro- to the macro-level.

When studying various processes and phenomena of scientific interest, quite often
there is a need to clarify the features and properties of various factors that influence these
processes and phenomena. In the presence of a large statistical material, multidimensional
mathematical and statistical methods can be successfully used to study these factors, which
also include correlation and regression analysis methods. Using these methods allows
obtaining conclusions and forecasts that can confirm or refute particular results of scientific
research.

The scope of application of correlation-regression analysis is quite wide and diverse,

due to the universality and variety of available methods. However, from a scientific
standpoint, the most interesting results of employing correlation and regression analysis can
be obtained in the economic realm. For example, the study of the impact of price, supply,
advertising costs, etc. on the demand for a certain product; the analysis of the dependence of
Gross Domestic Product (GDP) growth on the factors of the innovative economy or changes
in the structure of employment in the economy; the study of economic growth in the region;
or the study of inflation using econometric analysis. Quite interesting correlation and
regression studies can be carried out in the banking sector.

2. Purpose

The purpose of this report is to illustrate the concept of correlation analysis, detail the
methodology of its use, present its applications in Economics, and the interpretation of the
results when conducting economic studies.

3. Measures of Associations

In the broadest sense correlation is any statistical association, though it actually

refers to the degree to which a pair of variables is linearly related. Familiar examples of
dependent phenomena include the correlation between the height of parents and their
offspring, and the correlation between the price of a good and the quantity the consumers are
willing to purchase, as it is depicted in the so-called demand curve.

The measures of association determine the association between two variables or the
degree of association between two variables.

3.1. Covariance

The covariance is a measure of association between two variables. Let the variables
be X and Y and their corresponding means be x and y . The covariance is defined as:

Cov ( X , Y )=
∑ ( xi −x)( y i− y)
N

The covariance is the sum of the cross product of the deviations of the values of X and
Y from their means divided by the population size.

3.2. Correlation

Correlation refers to the associations between variables. When an association

exists between two variables, it means that the average value of one variable
changes as there is a change in the value of the other variable.

3.2.1. Introduction

A correlation is the simplest type of association. When a correlation is weak, it means

that the average value of one variable changes only slightly (only occasionally) in response to
changes in the other variable. If there is no association, it means that there is no change in the
value of one variable in response to the changes in the other variable.
In some cases, the correlation may be positive or it may be negative. A positive
correlation means that as one variable increases the other variable increases, e.g.
Height of a child and age of the child. Negative correlation implies as one variable
increases the other variable decrease, e.g. value of a car and age of the car.

The correlation between two variables measures the strength of the relationship
between them but it doesn’t indicate the cause and effect relationship between the
variables. Correlation measures co-variation, not causation. Causation means
a change in one variable affects/causes the changes in other variable. In other
words, just because two events or things occur together does not imply that one
is the cause of the other. A positive “linear” correlation between two variables say
X and Y implies that high values of X are associated with high values of Y, and that
low values of X are associated with low values of Y. It does not imply that X causes
Y.

3.2.2. History of Correlation

In 1885, Sir Francis Galton first defined the term "regression" and completed the
theory of bivariate correlation. A decade later, Karl Pearson developed the index that we still
use to measure correlation, Pearson's ‘r’.

The complete name of the correlation coefficient deceives many into a belief that Karl
Pearson developed this statistical measure himself. Although Pearson did develop a rigorous
treatment of the mathematics of the Pearson Product Moment Correlation, it was the
imagination of Sir Francis Galton that originally conceived modern notions of correlation and
regression. Galton, a cousin of Charles Darwin was an accomplished 19th century scientist
who made substantial scientific contributions to biology, psychology and applied statistics.

Figure 1.
Sir Francis Galton Karl Pearson
 It was in 1888 that Galton first wrote about correlation:

“Two variable organs are said to be co-related when the variation of the one is
accompanied on the average by more or less variation of the other, and in the same
direction … It is easy to see that co-relation must be the consequence of the variations
of the two organs being partly due to common causes. If they were wholly due to
common causes, the co-relation would be perfect, as is approximately the case with
the symmetrically disposed parts of the body. If they were in no respect due to
common causes, the co-relation would be nil …”

Karl Pearson, Galton's colleague and friend, pursued the refinement of correlation with
such vigor that the statistic r, a statistic Galton called the index of co-relation and Pearson
called the Galton coefficient of reversion, is known today as Pearson's r.

In 1896, Pearson published his first rigorous treatment of correlation and regression in the
Philosophical Transactions of the Royal Society of London. In this paper, Pearson credited
Bravais with ascertaining the initial mathematical formulae for correlation. Pearson noted that
Bravais happened upon the product-moment (that is, the "moment" or mean of a set of
products) method for calculating the correlation coefficient but failed to prove that this
provided the best fit to the data. Using an advanced statistical proof, Pearson demonstrated
that optimum values of both the regression slope and the correlation coefficient could be
xy
calculated from the product-moment, ∑ , where x and y are deviations of observed values
N
from their respective means and N is the number of pairs.

3.2.3. Types of Correlation

Correlation may be:

1. Positive and negative correlation

2. Linear and non-linear correlation

If two variables change in the same direction (i.e. if one increases the other
also increases, or if one decreases, the other also decreases), then this is called a positive
correlation. Examples are:
  Advertising and sales.
 Heights and weights;
 Household income and expenditure;
 Price and supply of commodities;
 Amount of rainfall and yield of crops

If two variables change in the opposite direction (i.e. if one increases, the other decreases and
vice versa), then the correlation is called a negative correlation. Examples are:

 Volume and pressure of perfect gas;

 Current and resistance [keeping the voltage constant]
 Price and demand for goods

The nature of the graph gives us the idea of the linear type of correlation between
two variables. If the graph is in a straight line, the correlation is called a “linear
correlation” and if the graph is not in a straight line, the correlation is non-linear
or curvi-linear.

In general two variables x and y are said to be linearly related, if there exists a
relationship of the form y = a + bx where ‘a’ and ‘b’ are real numbers. This is nothing but a
straight line when plotted on a graph sheet with different values of x and y and for constant
values of a and b. Such relations generally occur in physical sciences but are rarely
encountered in economic and social sciences.

The relationship between two variables is said to be non – linear if corresponding

to a unit change in one variable, the other variable does not change at a constant
rate but changes at a fluctuating rate. In such cases, if the data is plotted on a graph
sheet we will not get a straight line curve. For example, one may have a relation
of the form y = a + bx + cx2.

3.2.4. Methods of Determining Correlation

We shall consider the following most commonly used methods.

1. Scatter Plot
2. Karl Pearson’s coefficient of correlation
3. Spearman’s Rank-correlation coefficient.

3.2.4.1 Scatter Plot (Scatter Diagram or Dot Diagram)

Scatter Plots (also called scatter diagrams) are used to graphically investigate the
possible relationship between two variables without calculating any numerical
value. In this method, the values of the two variables are plotted on a graph paper.
One is taken along the horizontal (X-axis) and the other along the vertical (Y-axis).
By plotting the data, we get points (dots) on the graph which are generally
scattered and hence the name ‘Scatter Plot’.

The manner in which these points are scattered, suggest the degree and the
direction of correlation. The degree of correlation is denoted by ‘r’ and its direction
is given by the signs positive and negative.
 Figure 2. Degree of Correlation

Correlation Analysis with Scatter Plot

  If all points lie on a rising straight line, the correlation is perfectly positive and r = +1
(fig. 2(a))
 If all points lie on a falling straight line the correlation is perfectly negative and r = -1
(fig. 2(d))
 If the points lie in narrow strip, rising upwards, the correlation is high degree of
positive (fig. 2(b))
 If the points lie in a narrow strip, falling downwards, the correlation is high degree of
negative (fig. 2(e))
 If the points are spread widely over a broad strip, rising upwards, the correlation is
low degree positive (fig. 2(c))
 If the points are spread widely over a broad strip, falling downward, the correlation is
low degree negative (fig. 2(f))
 If the points are spread (scattered) without any specific pattern, the correlation is
absent. i.e. r = 0. (fig. 2(g))

Though this method is simple and is a rough idea about the existence and the degree
of correlation, it is not reliable. As it is not a mathematical method, it cannot measure the
degree of correlation.

3.2.4.2. Karl Pearson’s Coefficient of Correlation

It gives the precise numerical expression for the measure of correlation. It is denoted by ‘r’.
The value of ‘r’ gives the magnitude of correlation and its sign denotes its direction. The
mathematical formula for computing r is:

r=
∑ ( x i−x)( y i − y) ,
N σx σy

where x and y represents the standard deviations of x and y respectively; x and y are the
means of x and y respectively and N is number of pairs of observations.

3.2.4.3. Spearman’s Rank Correlation Coefficient

This method is based on the ranks of the items rather than on their actual values.
The advantage of this method over the others in that it can be used even when the
actual values of items are unknown. For example if we want to know the
correlation between honesty and wisdom of the girls of our class, we can use this
method by giving ranks to the girls. It can also be used to find the degree of
agreements between the judgments of two examiners or two judges. The formula
is:

6∑ D
2
R=1− 2 ,
N (N −1)

where R is the rank correlation coefficient; D is the difference between the ranks of two items
and N is the number of observations.

3.2.5. Interpretation of Correlation Coefficient

Through the coefficient of correlation, we can measure the degree or extent of the
correlation between two variables. On the basis of the coefficient of correlation we
can also determine whether the correlation is positive or negative and also its
degree or extent.

Correlation may be positive, negative or zero but lies with the limits ± 1. i.e. the value
of r is such that -1 ≤ r ≤ +1. The + and – signs are used for positive linear correlations and
negative linear correlations, respectively.

1. Perfect correlation: If two variables change in the same direction and in the same
proportion, the correlation between the two is perfect positive. According to Karl Pearson the
coefficient of correlation in this case is +1. On the other hand, if the variables change in the
opposite direction and in the same proportion, the correlation is perfect negative. Its
coefficient of correlation is -1. In practice we rarely come across these types of correlations.

2. Absence of correlation: If two series of two variables exhibit no relations between them
or change in one variable does not lead to a change in the other variable, then we can firmly
say that there is no correlation or absurd correlation between the two variables. In such a case
the coefficient of correlation is 0.

3. Limited degrees of correlation: If two variables are not perfectly correlated or there is a
perfect absence of correlation, then we term the correlation as Limited correlation.
  If x and y have a strong positive linear correlation, r is close to +1. An r value of
exactly +1 indicates a perfect positive correlation.
 If x and y have a strong negative linear correlation, r is close to -1. An r value of
exactly -1 indicates a perfect negative correlation
 If there is no linear correlation or a weak linear correlation, r is close to 0.

Rule of Thumb for Interpreting the Size of a Correlation Coefficient:

Degrees Size of Correlation

Positive Negative
Very high positive (negative) correlation 0.90 to 1.00 −0.90 to −1.00
High positive (negative) correlation 0.70 to 0.90 −0.70 to −0.90
Moderate positive (negative) correlation 0.50 to 0.70 −0.50 to −0.70
Low positive (negative) correlation 0.30 to 0.50 −0.30 to −0.50
Negligible correlation 0 to 0.30 0 to −0.30

3.2.6. Properties of Correlation

1. The correlation coefficient ‘r’ lies between -1 to +1.

2. Positive r indicates positive association between the variables, and negative r
indicates negative association.
3. Values of r near 0 indicate a very weak linear relationship. The strength of the
linear relationship increases as r moves away from 0 toward either -1 or 1. Values
of r close to -1 or 1 indicate that the points in a scatterplot lie close to a straight
line. The extreme values r = -1 and r = 1 occur only in the case of a perfect linear
relationship, when the points lie exactly along a straight line.
4. The correlation coefficient ‘r’ is the pure number and is independent of the
units of measurement of the variables.
5. The correlation coefficient ‘r’ is independent of change of origin i.e. the value
of r is not affected even if each of the individual value of two variables is
increased or decreased by some non-zero constant.
6. The correlation coefficient ‘r’ is independent of change of scale i.e. the value
of r is not affected even if each of the individual value of two variables is
multiplied or divided by some non-zero constant.
7. Correlation is meaningful only when the two variables are true random variables:
for example, if we restrict in some way the variability of one variable, then the
magnitude of the correlation will decrease.
8. Correlation cannot help us decide if changes in one variable result in changes in
the second variable, if changes in the second variable result in changes in the first
variable, or if changes in a third variable result in concurrent changes in the first
two variables.
9. Correlation can help provide us with evidence that study of the nature of the
relationship between x and y may be warranted in an actual experiment in which
one of them is controlled.
10. Correlation makes no distinction between the variables. It makes no difference
which variable you call x and which you call y in calculating the correlation.
11. Correlation requires that both variables be quantitative, so it makes sense to do the
arithmetic indicated by the formula for r. We cannot calculate a correlation
between the incomes of a group of people and what city they live in because city
is a categorical variable.
12. Correlation measures the strength of only a linear relationship between two
variables. Correlation does not describe curved relationships between variables,
no matter how strong they are.
13. Like the mean and standard deviation, the correlation is not resistant: r is strongly
affected by a few outlying observations. Use r with caution when outliers appear
in the scatterplot.
14. Correlations are frequently misunderstood and misused. It is important to note that
an observed correlation (i.e, association) does not assure that the relationship
between 2 variables is causal. Ice cream sales increase as the temperature
increases during summer, and so does the sales of fans. Hence, fan sales tend to
increase along with ice cream sales, but this positive correlation does not justify
the conclusion that eating ice cream causes people to buy fans.
4. Applications of Correlation in Economics

Microeconomics, which analyzes individual consumers and firms, features many

instances of positive correlation between variables, one of the most common being the
relationship between demand and price. The supply and demand curve shows that when
demand increases without a concomitant increase in supply, a corresponding increase in price
occurs. Similarly, when a demand for a good or service decreases, its price also drops.

The relationship between demand and price is an example of causation as well as

positive correlation. An increase in demand causes the corresponding increase in price; the
price of a good or service increases precisely because more consumers want it and therefore
are willing to pay more for it. When demand decreases, that means fewer people want a
product and sellers must lower its price to entice people to buy it. 

In contrast, supply is negatively correlated with price. When supply decreases without
a corresponding demand decrease, prices increase. The same number of consumers now
compete for a reduced number of goods, which makes each good more valuable in the eye of
the consumer.

Positive correlation also abounds in macroeconomics, the study of economies as a

whole. Consumer spending and GDP are two metrics that maintain a positive relationship
with one another. When spending increases, GDP also rises as firms produce more goods and
services to meet consumer demand. Conversely, firms slow production amid a slowdown in
consumer spending to bring production costs in line with revenues and limit excess supply.

Like demand and price, consumer spending and GDP are examples of positively
correlated variables where movement by one variable causes movement by the other. In this
case, consumer spending is the variable that affects a change in GDP. Firms set production
levels based on demand, and demand is measured by consumer spending. As the level of
consumer spending moves up and down, production levels strive to match the change in
demand, resulting in a positive relationship between the two variables.

Correlation is widely used in financial analysis and to support decision making,

improve operations, analyzing results, improve employee efficiency and Correct Mistakes.
5. Application Case Studies

5.1. Case Study 1: Jobless Rate and Delinquent Loan Rate in USA

At the beginning of 2009, the economic downturn resulted in the loss of jobs and an
increase in delinquent loans for housing. The national unemployment rate was 6.5% and the
percentage of delinquent loans was 6.12% (The Wall Street Journal, January 27, 2009). In
projecting where the real estate market was headed in the coming year, economists studied
the relationship between the jobless rate and the percentage of delinquent loans. The
expectation was that if the jobless rate continued to increase, there would also be an increase
in the percentage of delinquent loans. The data below show the jobless rate and the
delinquent loan percentage for 27 major real estate markets.

Jobless Delinquent
Metro Area Rate (%) X Loan (%) Y
Atlanta 7.1 7.02
Boston 5.2 5.31
Charlotte 7.8 5.38
Chicago 7.8 5.4
Dallas 5.8 5
Denver 5.8 4.07
Detroit 9.3 6.53
Houston 5.7 5.57
Jacksonville 7.3 6.99
Las Vegas 7.6 11.12
Los Angeles 8.2 7.56
Miami 7.1 12.11
Minneapolis 6.3 4.39
Nashville 6.6 4.78
New York 6.2 5.78
Orange County 6.3 6.08
Orlando 7 10.05
Philadelphia 6.2 4.75
Phoenix 5.5 7.22
Portland 6.5 3.79
Raleigh 6 3.62
Sacramento 8.3 9.24
St. Louis 7.5 4.4
SanDiego 7.1 6.91
San Francisco 6.8 5.57
Seattle 5.5 3.87
Tampa 7.5 8.42
For the above data, the Correlation Coefficient r = 0.44. Hence there is a low positive
correlation between Jobless rate and Delinquent house loan rate. A scatter diagram plotting
the two variables is shown below.

15

13

11
Delinquent Loan %

1
5 5.5 6 6.5 7 7.5 8 8.5
Jobless Rate %

5.2. Case Study 2: Effect of COVID19 in India

COVID19 related data (Daily Confirmed cases, Recovered cases and deaths) from 01 April
2020 to 31 Oct 2021 has been analysed in this example. A screenshot of the sample data is
shown below. The data is collected from https://www.covid19india.org.

Daily Total Daily Total Daily Total

Date Confirmed Confirmed Recovered Recovered Deceased Deceased
01-Apr-20 424 2059 19 169 6 53
02-Apr-20 486 2545 22 191 16 69
03-Apr-20 560 3105 39 230 14 83
04-Apr-20 579 3684 56 286 13 96
05-Apr-20 609 4293 43 329 22 118
06-Apr-20 484 4777 65 394 16 134
07-Apr-20 573 5350 75 469 27 161
08-Apr-20 565 5915 96 565 20 181
09-Apr-20 813 6728 70 635 46 227
10-Apr-20 871 7599 151 786 22 249
11-Apr-20 854 8453 186 972 41 290
12-Apr-20 758 9211 114 1086 42 332
13-Apr-20 1243 10454 112 1198 27 359
14-Apr-20 1031 11485 167 1365 37 396
15-Apr-20 886 12371 144 1509 27 423
16-Apr-20 1061 13432 258 1767 26 449
17-Apr-20 922 14354 273 2040 38 487
18-Apr-20 1371 15725 426 2466 35 522
19-Apr-20 1580 17305 388 2854 38 560
20-Apr-20 1239 18544 419 3273 33 593
21-Apr-20 1537 20081 703 3976 53 646
22-Apr-20 1292 21373 394 4370 36 682
23-Apr-20 1667 23040 642 5012 40 722
24-Apr-20 1408 24448 484 5496 59 781
25-Apr-20 1835 26283 442 5938 44 825
26-Apr-20 1607 27890 585 6523 56 881
27-Apr-20 1568 29458 580 7103 58 939
28-Apr-20 1902 31360 636 7739 69 1008
29-Apr-20 1705 33065 690 8429 71 1079
30-Apr-20 1801 34866 630 9059 75 1154

01-Oct-21 23918 33789197 25460 33060830 233 448015

02-Oct-21 23189 33812386 25938 33086768 242 448257
03-Oct-21 21644 33834030 26724 33113492 182 448439
04-Oct-21 17101 33851131 29645 33143137 263 448702
05-Oct-21 19044 33870175 24761 33167898 276 448978
06-Oct-21 22605 33892780 24610 33192508 316 449294
07-Oct-21 21474 33914254 24959 33217467 277 449571
08-Oct-21 19868 33934122 23066 33240533 247 449818
09-Oct-21 17941 33952063 23612 33264145 213 450031
10-Oct-21 19020 33971083 21583 33285728 193 450224
11-Oct-21 13184 33984267 26573 33312301 177 450401
12-Oct-21 16023 34000290 22846 33335147 229 450630
13-Oct-21 19193 34019483 19811 33354958 249 450879
14-Oct-21 16988 34036471 19370 33374328 378 451257
15-Oct-21 16003 34052474 17868 33392196 163 451420
16-Oct-21 14078 34066552 19786 33411982 146 451566
17-Oct-21 14286 34080838 19579 33431561 165 451731
18-Oct-21 12339 34093177 19460 33451021 164 451895
19-Oct-21 14935 34108112 19445 33470466 199 452094
20-Oct-21 18382 34126494 17568 33488034 160 452254
21-Oct-21 15774 34142268 18642 33506676 232 452486
22-Oct-21 16327 34158595 17636 33524312 666 453152
23-Oct-21 16079 34174674 16509 33540821 559 453711
24-Oct-21 14654 34189328 18608 33559429 442 454153
25-Oct-21 11852 34201180 16102 33575531 357 454510
26-Oct-21 13499 34214679 14012 33589543 584 455094
27-Oct-21 16351 34231030 17077 33606620 734 455828
28-Oct-21 14307 34245337 13189 33619809 805 456633
29-Oct-21 14215 34259552 13549 33633358 551 457184
30-Oct-21 12940 34272492 14672 33648030 445 457629
31-Oct-21 12907 34285399 13152 33661182 251 457880

It is natural to believe that there are strong correlations between Daily Confirmed
cases & Daily Recovered cases and Daily Confirmed cases & Daily Deaths. To statistically
prove this, correlation analysis of Confirmed cases against Recovered cases and Confirmed
cases against Deaths have been performed. For the Confirmed cases against Recovered
cases, the correlation coefficient is 0.9155 and for the Confirmed cases against Deaths, the
correlation coefficient is 0.8334. This confirms the assumption that the correlations are
strong. Corresponding scatter diagrams are shown below:

450000
400000
350000
300000
250000
200000
150000
100000
50000
0
0 50000 100000 150000 200000 250000 300000 350000 400000 450000

Daily Confirmed Cases (X) Vs. Recovered Cases (Y)

7000
6000
5000
4000
3000
2000
1000
0
0 50000 100000 150000 200000 250000 300000 350000 400000 450000

Daily Confirmed Cases (X) Vs. Deaths (Y)

5.3. Case Study 3: Economic Recovery Due to Timely Stringent Lockdown

This case study is taken from Indian Economic Survey 2020-2021. Evidence from the
experience of Spanish flu establishes that cities that intervened with lockdowns earlier and
more aggressively experience stronger recovery in economic front in the long run. Learning
from this experience, India implemented an early and stringent lockdown from late March to
May to curb the pace of spread of COVID-19. With the economy brought to a standstill for
two complete months, the inevitable effect was a 23.9 per cent contraction in GDP as
compared to previous year’s quarter. This contraction was consistent with the stringency of
the lockdown.

Figure. Correlation between Stringency and GDP Contraction during April-June 2020

Note: Bubble size corresponds to number of deaths as on 31st December, 2020; number of deaths per
lakh indicated with the bubble.

5.4. Case Study 4: Measure of Inflation Which Reflected Economic Activity Better in
2020-21

For the period April 2020 to November 2020, Consumer Price Index – Combined
(CPI-C) is weakly related to Index of Industrial Production (IIP) growth while Wholesale
Price Index (WPI) inflation and CPI-C Core inflation are positively and strongly related to
IIP growth. Therefore, core CPI-C inflation and WPI inflation, have been more in sync with
the demand conditions in the economy. During the period April 2020 to November 2020, the
correlation coefficient between WPI inflation and Year over Year (YoY) growth in IIP is
around 0.8 while the correlation coefficient between CPI-C core inflation and IIP growth has
been 0.9. The correlation between IIP growth and CPI inflation during the same period is 0.2.
Similarly, we can see high correlation of CPI Core inflation and WPI inflation with other
metrics of production and demand in the Indian economy as shown in the Table below. Food
items have a large weight of around 39 per cent in the CPI-C index. This means that shocks to
food prices due to COVID19 can have large impacts on CPI-C inflation.

Table: Correlation of Production Vs. Demand Metrics with CPI-C, Core and
WPI Inflation in 2020-21

6. Conclusion

In summary, correlation coefficients are used to assess the strength and direction of
the linear relationships between pairs of variables. When both variables are normally
distributed use Pearson's correlation coefficient, otherwise use Spearman's correlation
coefficient. Spearman's correlation coefficient is more robust to outliers than is Pearson's
correlation coefficient. Correlation coefficients do not communicate information about
whether one variable moves in response to another. There is no attempt to establish one
variable as dependent and the other as independent. Thus, relationships identified using
correlation coefficients should be interpreted for what they are: associations, not causal
relationships.

The use of correlation analysis extends to numerous important fields. For example, in
finance, correlation analysis can be used to measure the degree of linear relationships
between interest rates and stock returns, money supply and inflation, stock and bond returns,
and exchange rates.

Some of its short-comings include its unreliability, sensitivity to outliers, and the
suggestion of linear relationships where none exist.

As such, its interpretation should be viewed cautiously as investment decisions made

on biased correlation analysis can lead to (and it has) costly financial decisions.

7. References

1. Economic Survey 2020-21 Volume I, Govt. of India, January 2021.

2. Economic Survey 2020-21 Volume II, Govt. of India, January 2021.
3. Economics for Investment Decision Makers: Micro, Macro, and International
Economics, Christopher D. Piros, CFA, Jerald E. Pinto, CFA, Wiley, 2013.
4. Stock Market Correlations to Economic Indicators, Anthony K. Quandt, University of
Nebraska-Lincoln, 2020.
5. Correlation and Regression Analysis of Economic Problems, Lyudmila Valentinovna
Bolshakova; Alexander Nikolaevich Litvinenko; Inna Kazimirovna Sidenko; Anatoly
Nikolaevich Ivanov; Grigory Leonidovich Shidlovsky; Boris Semyonovich Limonov;
Farid Abdulalievich Dali, Revista Geintec, Vol. 11 No. 3, 2021.
6. Statistics for Business and Economics, Eleventh Edition, David R. Anderson, Dennis J.
Sweeney, Thomas A. Williams, South-Western Cengage Learning, 2011
7. The Practices of Statistics for Business and Economics, David S. Moore, George P.
McCabe, Layth C. Alwan, Bruce A. Craig.
8. Correlation analysis of macroeconomic and banking system indicators, Natalia
Larionovaa, Julia Varlamovab, Procedia Economics and Finance, International
Conference on Applied Economics (ICOAE) 2014 , Elsevier, 2014.
9. Examples of Positive Correlations in Economics, Greg DePersio, August 23, 2021,
https://www.investopedia.com/
10. https://www.covid19india.org/