Measures of

Correlation
Chapter 7
 Meaning of Correlation

Correlation indicates the relationship between two variables of a series so that changes in the
values of one variable are associated with changes in the values of the other variable.

Importance or significance of correlation

1) The correlation coefficient helps in measuring the extent of relationship between two
variables in one figure
2) Correlation analysis facilitates understanding of economic behavior and helps in locating the
critically important variables on which others depend.
3) When two variables are correlated, then value of one variable can be estimated, given the
value of another. This is done with the help of regression equations.
4) Correlation facilitates the decision-making in the business world. It reduces the range of
uncertainty as predictions based on correlation are likely to be more reliable and near to
reality.
 Types of Correlation

1) Positive Correlation

When two variables move in the same direction i.e. when one increases the other also
increases and when one decreases the other also decreases, then such a relation is called
positive correlation.

2) Negative Correlation

When two variables move in the opposite directions i.e. when one increases the other
increases and when one decreases the other increases, then such a relation is called
negative correlation.
 Degree of Correlation

1) Perfect Correlation

If the relationship between the two variables is such that the values of the two
variables change(Increase or decrease) in the same proportion, correlation between
them is said to be perfect.

Perfect correlation may be positive or negative

ct
• If the proportionate change in the values of two variables is in the same direction,
it is called perfect positive correlation and the value is described as +1

• However, if equal proportional changes are in the reverse direction, then the
relationship is known as perfect negative correlation and described as -1.
2) Zero Correlation

When there is no relationship between the two variables, we say that there is zero
correlation. So, a change in the value of one variable has no particular effect on the
value of the other variable. In this case, the value of coefficient of correlation will be
zero

Interpretation of Correlation Coefficient(r)

According to Karl Pearson, the coefficient of correlation lies between two limits i.e
+1 and -1.

• If there is a perfect positive relationship between two variables, the value of

correlation would be +1
• On the contrary, if there is a perfect negative relationship between two
variables, the value of the correlation will be -1.
• It means r(correlation coefficient) lies between +1 and -1.
Degree Of correlation Positive Correlation Negative Correlation
Perfect Correlation +1 -1
Very high degree of +0.9 -0.9
correlation
Fairly high degree of Between +0.75 and +0.9 Between -0.75 and -0.9
correlation
Moderate Degree of Between +0.5 and +0.75 Between -0.5 and -0.75
correlation
Low degree of correlation Between +0.25 and +0.5 Between -0.25 and -0.5
Very Low degree of Between 0 and +0.25 Between 0 and -0.25
correlation
No Correlation 0 0
 Methods of Measurement of Correlation

1) Scatter Diagram
2) Karl Pearson’s Coefficient of Correlation
3) Spearman’s Rank correlation Coefficient

Scatter diagram

It is a diagrammatic representation of a bivariate distribution to determine the nature of

correlation between the variables.

• A scatter diagram gives a visual idea about the nature of association between two
variables
• It is the simplest method of studying the relationship between two variables, without
calculating any numerical value.
 Interpretation of Scatter Diagram

1. Perfect positive correlation: If all the points of scatter diagram fall o a straight line
with positive slope, then the correlation is said to be perfectly positive i.e. r=+1
2. Perfect Negative Correlation: If all the points of scatter diagram fall on a straight
line with negative slope, then the correlation is said to be perfectly positive i.e. r=-1
3. Positive Correlation: When all the points of a scatter diagram cluster around a
straight line going upwards from left to right, the correlation is said to be positive.
4. Negative Correlation: When all the points of a scatter diagram cluster around a straight
line going downwards, the correlation is said to be negative.
5. No Correlation: If the points are scattered in a haphazard manner, then it is a case
of zero or no correlation
Make a scatter diagram for the following data and state the type of correlation between X & Y.

X 10 20 30 40 50
Y 70 140 210 280 350
Draw a scatter diagram for the following data and state the type of correlation between X &
Y.
X 15 20 25 27 30
Y 7 10 12 16 18
Merits of Scatter Diagram

1. Simplicity: It is a simple and non-mathematical method of studying between two

variables

2. Easily understandable: It can be easily understood and interpreted. It enables us

to know the presence or absence of correlation at a single glance of the diagram.

3. Not affected by extreme items: It is not influenced by the size of extreme items

4. First Step: It is the first step in investigating the relationship between two variables.

Demerits of Scatter Diagram

1. Non- Mathematical Method: This method does not indicate the exact numerical
value of correlation which is possible by other mathematical methods of correlation.

2. Rough Measure: It gives only a broad and rough idea of the degree and nature of
correlation between two variables.
3. Unsuitable for large observations: It is not possible to draw a scatter diagram on a
graph sheet in case of more than 2 variables.
 Karl Pearson’s Coefficient of Correlation

r= Sum of products of Deviations from mean/ Number of

observations X Standard Deviations
Calculation of Karl Pearson’s Correlation coefficient in Individual Series
X Y x= y= Y- x2 y2 xy
X- Ybar
Xbar
12 6 -9 -6 81 36 54
15 8 -6 -4 36 16 24
18 10 -3 -2 9 4 6
21 12 0 0 0 0 0
24 14 3 2 9 4 6
27 16 6 4 36 16 24
30 18 9 6 81 36 54
EX= EY= Ex2=2 Ey2=1
120 84 52 12
X Y
10 15
12 10
8 6
15 25
20 16
25 12
40 8

Ans- r= -0.178
Age of husband Age of wife
24 20
25 21
22 18
30 26
34 28
37 30

r=0.9925
Marks in History Marks in Pol. Science
20 25
35 30
15 20
40 35
10 20
35 25
30 25
25 35
45 35
30 30

Ans- r=0.76
Height of Fathers Height of sons
66 65
68 64
69 67
72 69
65 64
59 60
62 59
67 68
61 60
71 64

R=0.83