 Correlation studies and measures the direction and

intensity of relationship among variables.

 The degree of relationship between two variables is
measured by correlation analysis.
 ‘Correlation means that between two series or groups of
data there exists casual connection.”According to W.I.King
 Examples:1. Relationship between –Price of the
commodity and its demand.
 2. Relationship between Price of the
commodity and its supply.
 Correlation
Importance OR Significance of correlation

1. Study of relationship between Variables :

It enables us to make our decision for the
future course of action.

2. Helps us in understanding economic behaviour :

As Price & demand,
Price & supply,
Income & expenditure
 Types of correlation
Three important ways of classifying correlation are:
 Positive and negative correlation
 Simple, partial and multiple.
 Linear and non-linear
Positive correlation: When the variables move together in the same direction.

Negative correlation: When the variables move together in opposite directions.

Example : Increase in demand of a commodity tends to increase the

prices of commodity.

Example: Supply of a commodity increases the price of that

commodity comes down.
Simple, partial and multiple correlation

 Simple correlation: When only two variables are studied it is

simple correlation. When the relationship between two variable is
studied and of these two variable One is in dependent and the other is
non-dependent, then such correlations called simple correlation.E.g.-
Relation between income and expenditure

 Partial correlation: When correlation of two

variables are studied, keeping other variables
constant. E.g.-Crop yield depends upon so many factors
such as sufficient rainfall, amount of fertilizers, HYV seeds.
If we study only the relation between amount of rainfall,
crops yield keeping other factor constant is known as partial
correlation.
 Multiple correlation

: When more than two variables are studied to

determine the correlation.

Example :
The effect of rainfall, manure, water, etc. to increase
the productivity of what are simultaneously studied.
Linear correlation:
When the amount of change in one variable tends to bear constant change in
other variable.

X Y
5 20 80
10 40 60
15 60 Y
20 80 40

20

5 10 15 20
X
 Non- linear correlation
When the amount of change in one variable does not bear any ratio

with other variable.

40
X Y
20 10 30
Y
40 15 25
60 25
80 30 15
10
100 40
20 40 60 80 100

X
 Degrees of Correlation

Description Positive Negative

Perfect Correlation +1 (-) 1

High Correlation Between +0.75 and +1 Between - 0.75 and -1

Moderate Correlation Between +0.25 and 0.75 Between - 0.25 and - 0.75

Low correlation Between 0 and 0.25 Between 0 and - 0.25

No Correlation 0 0

Note : Correlation will not be more than 1 it may be up to (.89) or (.99)

calculated result must vary between – 1 to +1.