Correlation

The statistical tool with the help of which the

relationships between two or more than two
variables is studies is called CORRELATION.
Correlation Coefficient
Measures the degree to which the change in one
variable (the dependent variable) is associated with
change in the other variable (independent one).
Once we know that two variables are closely related,
we can estimate the value of one variable, given the
value of other.
 Correlation and Causation
Correlation analysis helps us in determining the
degree of relationships between two or more
variables – It does not tell us anything about
“Cause – Effect” relationship.
Correlation does not necessarily imply causation
of functional relationship though the existence of
causation always implies correlation.
 Correlation …Contd.
Month Advtg. Exp. Sales Rs.
The following are the January 50 1200
monthly figures of February 60 1500
advertising expenditure March 70 1600
and sales of a firm. It is April 90 2000
May 120 2200
generally found that ad.
June 150 2500
expenditure has its impact July 140 2400
on sales generally after August 160 2600
two months. Allowing for September 170 2800
this time lag, calculate co- October 190 2900
November 200 3100
efficient of correlation. December 250 3900
 Correlation …Contd.
Solution: Allow for a time lag of 2 months i.e. link
ad. Expenditure of January with sales for March
and so on.
Month Ad. Exp. x2 Sales y2 xy
X Y
x y
January 50 -7 49 1600 -10 100 70
February 60 -6 36 2000 -6 36 36
March 70 -5 25 2200 -4 16 20
April 90 -3 9 2500 -1 1 3
May 120 0 0 2400 -2 4 0
 Correlation …Contd.

Month Ad. Exp. x2 Sales y2 xy

X Y
x y
June 150 +3 9 2600 0 0 0
July 140 +2 4 2800 +2 4 4
August 160 +4 16 2900 +3 9 12
September 170 +5 25 3100 +5 25 25
October 190 +7 49 3900 +13 169 91
∑1200 ∑x = 0 ∑x2 ∑y ∑y = 0 ∑x2 ∑xy = 261
= 222 = 26,000
 Correlation …Contd.
= = 120 = = 2600

log r = log 261 – ½ (log 222 + log 364)

= 2.4166 – ½ (2.3464 + 2.5611)
= 2.4166 – 2.4537
= T .9629
= ALT .9629
r = 0.918