CORRELATION (LINEAR)

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CORRELATION
If two quantities vary in such a way that movements of one are accompanied by movements of others then these quantities are said to be correlated. Ex: relationship between price of commodity and amount demanded, Increased in amount of the rainfall and the production of rice The degree of relationship between variables under consideration is measured through the correlation analysis. The measure of correlation is called the correlation coefficient or correlation index ( usually denoted by r or ) 3 September 2012 2 The correlation analysis refers to the techniques

DEFINITIONS
Correlation analysis deals with the association between two or more variables. Simpson and Kafka Correlation is an analysis of co variation between two or more variables. A.M.Tuttle If two or more quantities were in sympathy so that the movement of one tend to be accompanied by the corresponding movements in the other then they are said to be correlated 3 September 2012 3 L.R.Conner

ANALYSIS
The problem of analyzing the relation between different series should be broken down in to three steps 1. Determining whether a relation exists and if it does, measuring it. 2. Testing whether it is significant. 3. Establishing the cause and effect relation if any.

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SIGNIFICANCE OF THE STUDY OF CORRELATION

Most of the variables show some kind of relationship
Once we know that two variables are closely related we can estimate the value of one variable given the value of another. Correlation analysis contributes to the understanding of the economic behavior The effect of correlation is to reduce the range of 3 September 2012 uncertainty

CORRELATION AND CAUSATION

1. The correlation may be due to pure chance especially in a small sample.
Income(rs) 500 Weight(lbs 120 )
600 140 700 160 800 180 900 200

The above data show a perfect positive relationship between income and weight i.e., as the income is increasing the weight is increasing and the rate of change between two variables is the same.
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2. Both the correlated variables may be influenced by one or more other variables. 3. Both the variables may be mututally influencing each other so that neither can be designated as the cause and the other the effect. Correlation observed between variables that cannot conceivably be casually related is called spurious or nonsense correlation
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TYPES OF CORRELATION
Positive or negative Linear and non linear correlation Simple , partial and multiple correlation

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POSITIVE OR NEGATIVE CORRELATION

Whether the correlation is positive or negative would depend up on the direction of the change of the variable. If both the variables are varying in the same direction , then the correlation is said to be positive. If the variables are varying in opposite direction the correlation is said to be negative

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Positive correlation
X Y 10 15 12 20 15 22 18 25 20 37

Y-Values
40 35 30 25 20

15
10 5

0
0
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10

15

20

25
10

Negative correlation
X Y 20 40 30 30 40 22 60 15 80 10

Y-Values
45 40 35 30 25 20 15 10 5 0 0
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20

40

60

80

100
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SIMPLE PARTIAL AND MULTIPLE CORRELATION

The distinction between simple partial and multiple correlation is based up on the number of variables studied. When only two variables are studied it is a problem of simple correlation When three or more variable are studied it is problem of either multiple or partial correlation. In multiple correlation three or more variables are studied simultaneously. On the other hand in partial correlation we recognize more than two variables but consider only two variables to be influencing each other the effect of 3 September 2012 12 other influencing variable kept constant.

LINEAR AND NONLINEAR(CURVILINEAR) CORRELATION correlation Distinction between linear and non linear

is based up on the constancy of the ratio of change between the variables. If the amount of change in one variable tends to bear constant ratio to the amount of change in the other variable then the correlation is said to be linear.
X Y 10 70 20 140 30 210 40 280 50 350

It is clear that the ratio of change between the two variables is the same. September 2012variables are plotted on the graph paper all 3 If such the plotted points would fall on a straight line.

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400 350 300 250 200 150

100
50 0 0 10 20 30 40 50 60

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Correlation would be called non linear or curvilinear if the amount of change in one variable does not bear a constant ratio with the amount of change in the other variable.

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METHODS OF STUDYING CORRELATION

1. Scatter diagram 2. Graphic method 3. Karl Pearsons coefficient of correlation. 4. Concurrent Deviation Method 5. Method of least squares
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SCATTER DIAGRAM METHOD

The simplest device for ascertaining if the two variables are related is to prepare a dot chart called scatter diagram. When this method is used the given data are plotted on a graph paper in the form of dots. I.e., for each pair of X and Y values we put a dot and thus obtain as many points as the number of observations. By looking to the scatter of the various points we can form an idea as to whether the variables are related or not. The greater the scatter of the plotted points on the chart the lesser is the relationship between the two 3 September 2012 17 variables

 If all the points lie on a straight line falling from the lower left hand corner to the upper right hand corner the correlation is said to be perfectly positive(r=1)
8 7 6

5
4 3 2 1 0 0
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8
18

If all the points are lying on a straight line rising from the upper left hand corner to the lower right hand corner of the diagram correlation is said to be perfectly negative.
8
7 6 5 4 3 2 1

0
0 1 2 3 4 5 6 7 8
19

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 If the plotted points fall in a narrow band there would be a high degree of correlation between the variables. If the points are widely scattered over the diagram it indicates very little relation ship between the 10 variables. 10
8 6 4 2 0 0 5 10
HIGH DEGREE OF POSITIVE CORRELATION

8
6 4 2 0 0 5 10
LOW DEGREE OF POSITIVE CORRELATION

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If the plotted points lie in a haphazard manner it shows the absence of any relationship between the variables
8
7 6 5 4 3 2 1 0 0 2 4 6 8 10 12 14

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EXAMPLE:
X Y 14 12 10 8 6 4 2 0 0
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2 6

3 5

5 7

6 8

8 12

10
22

 By looking at the scattered diagram we can say that the variables x and y are correlated. Further the correlation is positive because the trend of the points is upward rising from the lower left hand corner to the upper right hand corner of the diagram. It also indicates that the degree of relationship is higher because the plotted points are near to the line which shows perfect relationship between the variables.

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MERITS AND LIMITATIONS

MERIT S It is a simple and non mathematical method of studying correlation between variables. As such it can be easily understood and a rough idea can very quickly be formed as to whether or the variables are related. It is the first step in investigating relationship between 2 variables. LIMITATIONS: By applying this method we can get an idea about the direction of correlation and also whether it is high or low September 2012cannot establish the exact degree of But we 3 24 correlation between the variables as is possible by

GRAPHIC METHOD
When this method is used the individual values of the two variables are plotted on the graph paper. We thus obtain 2 curves. One for x variable and another for y variable. By examining the direction and closeness of the two curves so drawn we can infer if the variables are related or not. If both the curves drawn on the graph are moving in the same direction (either upward or downward)then the correlation is said to be positive. On the other hand if the curves are moving in the opposite direction correlation is said to be negative.
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Year
1979 1980 1981 1982

Average income
100 102 105 105

Average expenditure
90 91 93 95

1983
1984

101
112

92
94

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120
INCOME

100 80 60 40 20 0
EXPENDITURE

Series 1 Series 2

1979

1980

1981

1982

1983

1984

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KARL PEARSONS COEFFICIENT OF CORRELATION

Among several mathematical methods of measuring correlation, the Karl Pearsons method, popularly known as Pearsons coefficient of correlation, is most widely used in practice It is denoted by the symbol or r

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CORRELATION COEFFICIENT
If [X,Y] is a two dimensional random variable, the correlation coefficient, denoted r, is

X Y

=Cov(X,Y) Var(X) . Var(Y)

= XY

This is also called as PEARSON CORRELATION COEFFICIENT

X Y

= xy (x2 * y2)
, where

= xy N

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x=(X-X) ; y=(Y-Y) X = Standard Deviation of X and Y = Standard Deviation of Y

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 Take the deviations of X from the mean of X and denote by x

STEPS TO CALCULATE CORRELATION COEFFICIENT

Square these deviations and obtain the total i.e., x2

Take the deviations of Y from the mean of Y and denote by y

Square these deviations and obtain the total i.e., y2 Multiply the deviations of X and Y and obtain the total i.e., xy
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EXAMPLE
Calculate the Karl Pearsons Correlation Coefficient from the following data and interpret its value Roll no of students: 1 2 3 4 5 Marks in Accountancy : 48 35 17 23 47 Marks in Statistics: 45 20 40 25 45 SOLUTION: Let marks in Accountancy be denoted by X and Statistics by Y
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Roll no
1

(X34) x
14

x2

(Y-35) y
10

y2

xy

48

196

45

100

140

2
3 4 5

35
17 23 47

1
-17 -11 13 x=0

1
289 121 169

20
40 25 45

-15
5 -10 10

225
25 100 100 y2=55 0

-15
-85 110 130 xy=28 0
32

Y=175 y=0 x2=77 6

X=170
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 The Pearsons coefficient of correlation is

= xy (x2 *y2)
where x=(X-X); y=(Y-Y) , X'= X N; Y=Y N xy=280 x2=776 y2=550

= 280 (776 * 550) = 0.496

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DEGREE OF CORRELATION
The value of always lies between -1 and 1. If lies between 0 and 1, it is positive. Else, if it lies between -1 and 0, it is negative

If =1, then the two variables are said to be perfect positively correlated
If =-1, then the two variables are said to be perfect negatively correlated If =0, then the two variables are not correlated

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