ECONOMICS

CLASS XI

CORRELATION

Understanding Concepts
 Introduction

One important job of statistics is to compare different

sets of things to see if there is a possible link between
the two.

Example
To compare:
 people's income with their education
 prices and demand of goods
 weight of person with height etc.
 These sorts of studies involve comparison between
two variables to see the connection.

 With implementation of mid-day meal scheme,

does the frequency of attending schools increases?
 As price decreases, does demand for the good
increases?
 Does weight increases with height?

What we are looking for, with such questions

statistically is called correlation.
 Correlation

A statistical tool which study the relationship between

two or more variables

Example: With increase in temperature demand for

woolen clothes decreases and vice-versa.
 Significance

 Determines the degree of relationship between

variables.
By knowing one variable other variables can be
known.
Example: If price of wheat decreases, demand for
wheat will increase.
 Helps in formation of laws and concepts in
economic theory.
Example: Law of supply, law of demand etc.

Supply
Y

P
Price

Demand

O
Q X
Quantity
 Helps in framing policies
Example: If there is positive correlation between
investment policy and development, then government
would increase investment.
 Economists establish relationship between the
variables like demand and supply, price level etc.

 Helps in business activities to take profitable decisions

Example: If producer is earning profit, he will increase
production.
 Properties

 The value of correlation (r) always lies between –1 to

+1 (–1 < r < + 1)

 Positive relationship: Value of “r” lies between 0 and 1

Example: When income increases demand also
increases.

 Negative relationship: Value of “r” lies between 0 and -1

Example: Price increases demand decreases and price
decreases demand increases
 No linear relation: If r = 0, there is no correlation
between the two variables
Example: Size of shoes and number of children born

 Perfect correlation: If the value of r = +1 or -1

-1 0 +1

Perfect No Correlation Perfect

Negative Positive
Correlation Correlation
 As correlation gets close to -1, it gets stronger
Example: A correlation of - .9 is stronger than - .5

 If the value of r is close to 1, it gets stronger.

Example: A correlation of .6 is stronger than .3
 E MB ER
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t io n .
a r e c
indicate at indicates di t he
ol t h o k a t
symb ng t h , ju s t lo
g s t r e
h ile j u dgin e s ig n .
W d igno r
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numbe
Correlation does not mean causation
It does not measure cause and effect relationship.
It measures only degree and intensity of relationship.
Example: Correlation between number of hours students
devote on study with computers and the result achieved.

It is not necessary that computer users score more marks.

Other factors, like socioeconomic status might also play a
vital role.
Thus there is no cause and effect relationship.
In some cases we may be interested not just in whether
there is a correlation or not, but how strong that
correlation might be.
 Types

Positive correlation Negative correlation

 Positive correlation
Variables move together in same direction i.e., if one
increases the other also increases, or vice-versa

Both Increasing Both Decreasing

Price of petrol Taxi fare (Rs) Temperature( Demand for ice-
(Rs) C0) cream
12 8 12 18
14 10 8 12
16 12 3 5
 Negative correlation
When variables move in the opposite direction i.e,
if one increases, the other decreases and vice-
versa

Price (Rs) Demand (Quantity) Price (Rs) Demand (Quantity)

5 20 10 15
8 18 8 18
10 15 5 20
 Methods of Studying
Correlation

Scatter Diagram Spearman’s Rank

Correlation

Karl Pearson’s
Coefficient of
Correlation
 Scatter Diagram

 A statistical tool for analyzing graphically the

relationship between two variables.

 By looking at points we obtain an estimation whether the

variables are related or not.
 Types of Scatter
Diagram

1 Positive Correlation

2 Negative Correlation

3 Perfect Negative Correlation

4 Perfect Positive Correlation

5 No Correlation
 Positive
Correlation
Variables change in the same direction.
or

Education
Relationship between two variables that
vary together in the same direction

Example: O Salary

More education, more salary

 Negative
Correlation

Variables move in opposite direction.

When one variable increases, other

Price
decreases and vice-versa.

Example:
O
Quantity demanded
Decrease in price will lead to an increase
in quantity demanded.
 Perfect Positive
Correlation

Proportionate change of the

variables in same direction

Tickets Sold
Example:
Amount of money collected by movie
tickets with the number of sale of tickets.
O
Money collected
 Perfect Negative
Correlation

Proportionate change in the variables

in opposite direction.

Time
Example:
Speed of a car and the time it takes
O
to reach destination. As the speed Speed
increases, the total time taken
decreases.
 No
Correlation

When no relationship is found

Marks in exam
between the two variables

Example:
High score in exam and weather
conditions. Temperature
 Benefits

1 Simplest method of studying the relationship

between the two variables

2 Shows whether the relationship is positive or

negative

3 One can know the result in seconds after looking at

the graph
 Drawback
s

1 Gives an idea but not exact answer.

2 Shows only quantitative relationship not

qualitative

3 Does not measure the precise extent of

correlation
 Your Turn

Plot a scatter diagram of the data below.

Comment on the pattern shown by the scatter
diagram.

(i) Variable X 1 2 3 4

Variable Y 4 3 2 1

Variable X 2 4 6 12
(ii)
Variable Y 3 7 2 5
Let us see a better method to measure
the degree of correlation.
 Karl Pearson’s Coefficient
of Correlation

 Gives an exact idea about the degree of linear

relationship between the two variables

 It is also known as coefficient of correlation or

product moment correlation coefficient.
 Methods of Calculation

1. Direct method

r=
∑ xy
∑ x ∑y2 2

2. Indirect method

( ∑ )
dx∑ ×( dy )
∑dxdy −
N
r=
( ∑dx ) ∑ ( )
2 2
dy
∑dx 2
− ∑
N
× −2
dy
N
Direct method

r=
∑ xy
∑ x ∑y
2 2

r = Coefficient of correlation
x=X −X
y =Y −Y
It can be written as:

r=
∑ xy
N σ xσ y

r = Coeficient of correlation
x= X-X
y=Y-Y
σ X = Standard Deviation of x series
σ y = Standard Deviation of y series
N = Number of observations
Example: Calculate the correlation between
production of bread and demand for flour.

Bread 9 11 13 12 10 9 6

Flour 4 8 13 11 9 6 5
Step 1 Calculate arithmetic mean

Bread (X) Flour (Y)

9 4

11 8

13 13
∑ X 70
12 11 X= = = 10
N 7
10 9

9 6
∑ Y 56
6 5 Y = = =8
N 7

∑ X = 70 ∑Y =56
Step 2 Take deviations of both the series with their
corresponding mean and sum up these deviations.
Bread (X) Wheat (Y) x= X ( −X 1X0) (
y = Y = −Y Y8 ) =
9 4 -1 -4
11 8 0
1
13 13
3 5
12 11
2 3
10 9
0 1
9 6
-1 -2
6 5
-4 -3

∑ X = 70 ∑Y =56 ∑x=0 ∑y = 0
Step 3 Square these deviations to get ∑ and
x 2
∑ y2

Bread Wheat x = X −Xy = Y −Y

(X) (Y) x2 y2
9 4 -1 -4 1 16

11 8 1 0 1 0
13 13 3 5
9 25
12 11 2 3
4 9
10 9 0 1
0 1
9 6 -1 -2
1 4
6 5 -4 -3
16 9

∑x 2
= 32 ∑ = 64
y 2
Step 4 Multiply both these deviations to get ∑xy
Bread Wheat
2
(X) (Y) x= X −yX = Y −Y x y2 xy
9 4 -1 -4 1 16 4
11 8 1 0 1 0 0
13 13 3 5 9 25
15
12 11 2 3 4 9
6
10 9 0 1 0 1
0
9 6 -1 -2 1 4
2
6 5 -4 -3 16 9
12
∑ x y= 39
Step 5 Put values in the
formula
∑ xy
r=
∑ x2 ∑ y 2

39
=
32 × 64

= 0.86
0.86 means positive and high degree of correlation
 Indirect method

( ∑ )
dx∑ ×( dy )
∑dxdy −
N
r=
( ∑dx ) ∑ ( )
2 2
dy
∑dx 2
− ∑
N
× −2
dy
N

N=
Number of observations
Example: Calculate the correlation between death
rate and birth rate from the following hypothetical
data:

Year 1941 1951 1961 1971 1981 1991

Birth rate 24 26 32 33 35 30

Death rate 15 20 22 24 27 24
Step 1 Take any arbitrary value in the X series and Y
series as assumed mean (A).

Birth rate (X) Death rate (Y)

24 15

26 20

32 22

33 24
(A) (A)
35 27

30 24
 Take the deviations of both series from assumed
Step 2
∑
mean and add to get dx and dy ∑

X Y dx = X − A dy = Y − A
24 15 -9 -9

26 20 -6 -4
32 22 -2
-1
33 24
(A) (A) 0 0
35 27
2 3
30 24
-3 0
∑ d x = −17 ∑ dy = −12
 Square the deviations and sum up to get
Step 3
∑ dx and ∑ dy
2 2

X Y dx = X − A dy = Y − A dx2 dy 2
24 15 -9 -9 81 81

26 20 -6 -4 36 16
32 22 -1 -2
1 4
33 24 0 0
0 0
35 27 2 3
4 9
30 24 -3 0
9 0

∑ d x= −17 ∑ d y = −12 ∑ dx = 131 ∑ dy = 110

2 2
Step 4 Multiply both deviations to get ∑ dx. dy

X Y dx = X − A dy = Y − A dx2 dy 2 dx. dy
24 15 -9 -9 81 81 81

26 20 -6 -4 36 16 24
32 22 -1 -2 1 4
2
33 24 0 0 0 0
0
35 27 2 3 4 9
6
30 24 -3 0 9 0
0

∑ dx = −17 ∑ dy = −12 ∑ dx = 131 ∑ dy = 110 ∑ dx. dy= 113

2 2
Step 5 Put values in the formula

( ∑ )
dx∑ ×( dy )
∑dxdy −
N
r=
( ∑dx ) ∑ ( )
2 2
dy
∑dx 2
− ∑
N
× −2
dy
N

( −17
×
)−( 12
)
113 −
r= 6
( −17) 2 − ( 12 ) 2
131 − 1−
10
6 6
 204
113 −
= 6
289 144
131 − 110−
6 6

113 −34
=
.
131 −48 16 − 24
110

79
=
82 .84 86
 79
=
9.10 ×9.27

79
=
84 .35

= 0.93

There is high degree of correlation

 Step deviation method

Follow same steps as in case of indirect method.

The difference is that, in this method we divide all
deviations by some common value.

∑ dx′. dy ′ − ∑ dx ′ ∑ dy ′
r= N
( ∑ dx ′ ) ( ∑ dy ′)
2 2

∑ dx′ 2
−
N
∑ dy ′2
−
N
 Spearman’s Rank Correlation

Sometimes definite measurement of variables is not

possible.
Example: Variables such as leadership ability,
intelligence, beauty etc. cannot be measured in
quantitative terms.
Such variables are Known as qualitative variables.
 Formula for Different
Cases
When ranks are given
When ranks are not given

6 ∑D2
rk =1−
N 3 −N

N =Number of pairs of observations

∑ =Total of squares of the

D 2

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
Example: In a dancing competition, two judges gave the
following ranks to 9 contestants.
Rank
Judge A 8 7 6 3 9 2 1 5 4

Judge B 7 5 4 1 9 3 2 6 8
 Step 1 Find rank differences of corresponding variables
JUDGE A JUDGE B D = R1 – R2
8 7 1
7 5
2

R1 = Row 1 6 4
2

R2 = Row 2 3 1
2
D = Rank difference of 9 9
0
corresponding
2 3
variables -1
1 2
-1
5 6
-1
4 8
-4
Step 2 Square differences (D) and add to get ∑D 2

JUDGE A JUDGE B D = R1 – R2 D2
8 7 1 1

7 5 2 4
6 4 2 4
3 1 2 4
9 9 0
0
2 3 -1
1
1 2 -1
1
5 6 -1
1
4 8 -4
16

∑D 2
= 32
Step 3 Put values in the
formula
6 ∑D2
rk =1−
N 3 −N
6 (32)
=1− 3
9 −9

192 192
=1− = −1
729 −9 720

rk = 0.74
When ranks are not
given

 Rank them in increasing or decreasing form.

 Same formula is used for calculation.

6 ∑D2
rk =1−
N −N
3
Example: Marks of 5 students in English and Economics
out of 30 are as follows:

Subject Marks
Judge A 16 10 20 30 14

Judge B 25 15 10 12 16
Step 1 Assign ranks to each series by taking either
acsending or decsending order.

English Rank (R1 ) Economics Rank (R2)

16 3 25 5

10 1 15 3

20 4 10 1

30 5 12 2

14 2 16 4
Step 2 Find rank differences of corresponding variables

English R1 Economics R2 D= R1 - R2
16 3 25 5 -2

10 1 15 3 -2

20 4 10 1
3

30 5 12 2
3

14 2 16 4
-2
Step 3 Square the differences (D) and add to get ∑D 2

English R1 Economics R2 D D2
16 3 25 5 -2 4

10 1 15 3 -2
4

20 4 10 1 3
9

30 5 12 2 3
9
14 2 16 4 -2
4
∑D 2
= 30
Step 4 Put values in the formula

6 ∑D 2

rk =1−
N3 −N

6 (30)
rk =1− 3
5 −5

180
=1−
120
=1− 1 5
.

rk =− 0.5

It impliesanegativecorrelation
 Your Turn

Calculate the Spearman's Rank Correlation of

Coefficient for from the set of data given below.

Height 145 183 175 168 169 170

(cm)
Weight 45 82 89 65 66 70
(Kg)
 When ranks are equal or
repeated

Sometimes, more than one item has equal rank.

In that condition, averages of repeated ranks to each
values are assigned.
Example: Mr. Sam and Mr. Ajit after tasting 10 different
Indian food rank it as follows

Rank
Mr. Sam 10 18 14 5 7 12 6 3 10 4

Mr. Ajit 12 20 14 10 20 17 3 20 18 5
 Step 1 There are two 10s. Take the mean of their ranks.
The mean of 4+5/2 = 4.5. Assign rank 4.5 to
both10s. Same with 3rd column.

Mr. Sam Rank (R1) Mr. Ajit Rank (R2)

10 4.5 12 7
18 1 20 2
Note:
14 2 14 6
Total allotted rank
5 8 10
8 should be equal to
total number of
7 20 2
6 items.
12 17
3 5
6 3
7 10
3 20
10 2
10 18
4.5 4
4 5
9 9
 Step 2 Find rank differences of corresponding variables
Mr. Sam Rank (R1) Mr. Ajit Rank (R2) D =R1 - R2
10 4.5 12 7 -2.5
18 1 20 2 -1
14 2 14 6 -4
5 8 10 8
0
7 6 20 2
4
12 3 17 5
-2
6 7 3 10
-3
3 10 20 2
8
10 4.5 18 4
0.5
4 9 5 9
0
Step 3 Square differences (D) and add to get ∑ D 2

Mr. Sam Rank Mr. Ajit Rank D D2

(R1) (R2)
10 4.5 12 7 -2.5 6.25
18 1 20 2 -1 1
14 2 14 6 -4 16
5 8 10 8 0
0
7 6 20 2 4
16
12 3 17 5 -2
4
6 7 3 10 -3
9
3 10 20 2 8
64
10 4.5 18 4 0.5
.25
4 9 5 9 0
0
∑D 2
=116 .5
Step 4 Put values in formula
 1 1 
6  ∑ D 2 + (m31 − m1 ) + (m32 − m2 ) + .... 
12 12
rk =1 −  
N3 − N

Here, m = n umber of items of equal ranks

 1 3 1 3 
116.5 + 12 ( 2 − 2) + 12 (3 − 3)
rk =1 −
103 −10

 1 1 
116. 5 + ( 6 ) + ( 24 ) 
12 12
=1 −
1000 − 10
  1 
6 116.5 + + 2 
 2 
=1 −
990

6 [ 119]
=1 −
990

714
=1 −
990

=1 − 0.72
= .28

The data shows positive 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 then it is called negative

correlation. With an increase in the value of one
variable there is a decrease in value of other.
A presentation by