ECONOMICS

CLASS XI

CORRELATION

Basic Concepts

Introduction
Many times, we come across problems which involve two or more variables. Example:  Rainfall and production of rice  Road accidents and number of cars  Sales and profit etc.

We find that there is always some relationship between the two variables.

When one variable changes, the other also changes in the same or in the opposite direction, we say that the two variables are correlated.

Correlation
A single number that describes the degree of relationship between two variables.

Relation between income and consumption. With rise in income consumption increases and vice-versa

Significance

 Determines the degree of relationship between variables. By knowing one variable other variables can be chalked out.

 Helps in measuring the relationship between the two variables

 Helps in formation of laws and concepts in economic theory

 Economists establish relationship between the variables like demand and supply, price level etc.

 Helps in framing policies

 Helps in business activities to take fruitful decisions

R MEMBE RE

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Types

Positive correlation
Y

Negative correlation
Y

O

X

O

X

Positive correlation: Variables move together in same direction Example: Advertising and sales

Negative correlation: Variables move in opposite direction Example: Higher the price of petrol less will be its demand

Properties
 The value of correlation (r) always lies between –1 to + 1 (– 1 < r < + 1).  Value of r lies between 0 and 1  Value of r lies between 0 and -1 correlation  r=0 -1
Perfect Negative Correlation

Positive correlation Negative

No correlation
0 No Correlation

+1
Perfect Positive Correlation

Methods of Studying Correlation

Scatter Diagram

Spearman’s Rank Correlation

Karl Pearson’s Coefficient of Correlation

Scatter Diagram

Simplest way of determining the relationship between two variable in a special type of dotted chart
Y

O

X

Types of Scatter Diagram

1 2 3

Positive Correlation Negative Correlation

Perfect Negative Correlation

4 5

Perfect Positive Correlation

No Correlation

Positive Correlation
As the value of one variable increases, the value of other variable also increases. Example: Temperature and sale of cold drinks.

Negative Correlation
As the value of one variable increases, the value of other variable also decreases. or Two variables move in different direction Example: Watching TV and marks scored. Students spending more time watching TV tend to score less marks in class and vice-versa.

Perfect Positive Correlation

Change in two variables in equal proportion in the same direction

Y

O

X

Perfect Negative Correlation

Change in two variables in equal proportion in an inverse direction
Y

O

X

No Correlation

The points are randomly scattered on graph Example: Rainfall in India and production of cars in Germany

Rainfall
Production of cars

Your Turn
Following are the details of heights and weights of 5 students of a class, draw a scatter diagram and determine the form of association.

Weight (Kg) Height (inches)

50 62

65 72

60 70

50 58

Karl Pearson’s Coefficient of Correlation

 A mathematical method for measuring the linear relationship between the variable X and Y  It indicates the quantitative relationship between two variables.
Karl Pearson, a pioneer of statistics, developed ideas of correlation and regression that have been widely applied across different branches of science.

Methods of Calculation
1. Direct method

r=

∑ xy ∑ x ∑y
2

2

2. Indirect method
d ∑ xdy d ∑x
2

r=

d )× ( ∑ x∑( dy − N
2

)
d y

d ( ∑x ) − × ∑ N

∑ −y d
2

(

2

)

N

Example: Calculate the correlation between the weights and heights of 9 students by direct method.

Weight (Kg) Height (cm)

48

49

50 105

51

52

53

54

55

56

100 105

104 110 115 125 130 132

Weight (X) Height (Y)

Calculate mean for X and Y

48 49 50

100 105 105 104 110 115 125 130 132

∑X X= N 468 = 9 = 52

∑Y Y = N 1026 = 9 = 114

51 52 53 54 55 56

∑ X = 468 ∑Y =1026

X
48 49 50 51

Y
100 105 105 104 110 115 125 130 132

x= X
-4 -3 -2 -1 0 1 2 3 4

−Xy = Y −Y
- 14 -9 -9 - 10 -4 1 11 16 18

xy
56 27 18 10 0 1 22 48 72

x2
16 9 4 1 0 1 4 9 16

y2
196 81 81 100 16 1 121 256 324

Here, X = 52 Y = 114

52 53 54 55 56

∑ xy = 254

x 2 = 60 ∑ y 2 = 1 1 7 6 ∑

r=

∑ xy ∑x ∑y
2 2

=

254 60 × 1176

= .95
Positive correlation between weight and height

Example: Calculate Karl Pearson’s correlation between price and demand by indirect method.

Price (Rs) Demand (Quantity)

14 84

16 78

17 70

18 75

19 66

20 67

21 62

22 58

23 56

Price (X)
14 16 17 18 19 20 21 22 23

Demand (Y)
84 78 70 75 66 67 62 58 56

dx = X − A ( A = 20)
-6 -4 -3 -2 -1 0 1 2 3

dy = Y − A ( A = 70)
14 8 0 5 -4 -3 -8 -12 -14

∑ dx= −12

∑ dy = −14

dx = X − A dy = Y − A -6 -4 -3 -2 -1 0 1 2 3 14 8 0 -5 -4 -3 -8 -12 -14

dx2
36 16 9 4 1 0 1 4 9

dy 2
196 64 0 25 16 9 64 144 196
2

dx. dy
-84 -32 0 10 4 0 -8 -24 -42

∑ dx= −12 ∑ d y = −14 ∑

2 d x = 8 0 ∑ dy = 714 ∑ dy.dy = −176

r=
2

∑dx∑ dy ∑dx . dy N ∑dx −

( ∑dx∑ )
N

2

dy −

2

(dy
N

2

)

r=

( −176− )

( −12× − 14 ) ( ) 9
2 2

( −12 ) 714 − 14 ( 80 − − 9 9

)

−176 (18.66) − r= 144 196 80 − 714 − 9 9 −176 (18.66) − r= 64 692.33 −194.66 r= 8× 26.31 r= −194.66 210.48

r =− .92 Itisacaseof strong negativecorrelation

.

Your Turn

Calculate correlation of coefficient between variable X and Y.
Variable (X) Variable (Y) 6 13 2 8 4 12 9 15 1 9 3 10 5 11 8 16

Spearman’s Rank Correlation
 Helps in calculating the correlation of qualitative variables  Based on ranks of items rather than their actual values  Can be used even when actual values are unknown Example: To know the correlation between honesty and wisdom, one can use this method by assigning ranks to items.
Charles Edward Spearman, an English psychologist Known for work in statistics and for Spearman's rank correlation coefficient.

Formula for Different Cases
When ranks are given When ranks are not given

rk =1−

6 ∑D2 N 3 −N

N =Number of pairs of observations D 2 =Total of squares of the ∑ differences of corresponding ranks

Formula for Different Cases
When ranks are equal or repeated

1 1   6  ∑ D 2 + (m31 − m1 ) + (m3 2 − m2 ) + ....  12 12  rk =1 −  N3 − N m = Number items of equal ranks

When ranks are given
In a singing competition, two judges accorded following ranks to 10 contestant.

Judge A Judge B

10 10

8 6

5 5

3 4

6 7

1 9

2 8

9 2

7 1

4 3

JUDGE AJUDGE BD =R1 – R2

D2 0 4 0 1 1 64 36 49 36 1

10 8 5 3 6

10 6 5 4 7 9 8 2 1 3

0 2 0 -1 -1 -8 -6 7 6 1

Here, R1=Row 1 R2= Row 2

1 2 9 7 4

D 2 =192 ∑

rk =1 −

6 ∑D 2 N3 − N

6 (192) =1 − 3 10 − 10 1152 =1 − 990 =1 1 . − 16 =− 0.16

When ranks are not given
Calculate Spearman’s coefficient of correlation between marks assigned to 7 students by tow judges in a poem competition.

Judge A Judge B

25 12

12 10

40 18

20 8 16 6

15 25

10 15

Judge A Rank (R1) 25 12 40 20 8 15 10 2 5 1 3 7 4 6

Judge B 12 10 18 16 6 25 15

Rank (R2) 5 6 2 3 7 1 4

D = R1- R 2 -3 -1 -1 0 0 3 2

D2 9 1 1 0 0 9 4

D 2 = 24 ∑

rk =1 −

N − N
3

6 ∑D

6(24) =1 − 3 7 − 7 144 =1 − 3 7 − 7 144 =1 − 336

=1 0.43 − rk = 0.57 Positive correlation

Your Turn

Marks of 10 students in Hindi and English are given below. Find the correlation between the two subjects.

Hindi English

80 38 85 50

95 30 74 92 58 70

84 65

91 88

60 66 40 56 52 46

When ranks are equal or repeated
Marks of 7 students in accounts and statistics out of 50 marks are given.
Subject

Marks 40 38 42 35 45 42 40 35 47 30 42 40 30 35

Accounts Statistics

Accounts Statistics 37 42 35 40 47 42 30 38 45 42 35 30 40 35

R1 3 5.5 2 4 7 5.5 1

R2 4 7 6 2.5 1 5 2.5

D = R1- R 2 -1 -1.5 -4 1.5 6 0.5 -1.5

D2 1 2.25 16 2.25 36 0.25 2.25

∑ D = 60
2

1 1   2 3 3 6  ∑ D + (m 1 − m1 ) + ( m 2 − m2 ) + ....  12 12   rk =1 − N3 − N Here, m = number of items of equal ranks 1 3 1 3   6 60 + ( 2 − 2) + ( 2 − 2) + .... 12 12   =1 − 73 − 7 1 1   6 60 + ( 6) + ( 6) + .... 12 12   =1 − 73 − 7

1 1  6 60 + +  2 2  =1 − 336 =1 − 6 [ 61] 336

366 =1 − 336 =1 − 1.08 r = − 0.08

Negative correlation

Now, on your FINGER TIPS…
• Qualitative Variables: Those variables which cannot be measured such as bravery, wisdom, beauty etc. Correlation: A single number that describes the degree of relationship between two variables. When both the variables move in same direction they are said to the positively correlated and when move in opposite direction, it is called negative correlation. • Scatter Diagram: It is a graphic method of studying correlation.

Ranking: Allotment of rank on the basis of ascending or descending order Negative correlation: When the two variables move in opposite direction, it is called negative correlation. With an increase in the value of one variable there is a decrease in value of other.

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