Correlation

Meaning of Correlation

Correlation measures the association between two variables. Correlation is a statistical technique which tells us if two variables are related.

For example, consider the variables family income and family expenditure. It is well known that income and expenditure increase or decrease together. Thus, they are related in the sense that change in any one variable is accompanied by change in the other variable. Again, price and demand of a commodity are related variables; when price increases demand will tend to decreases and vice versa. If the change in one variable is accompanied by a change in the other, then the variables are said to be correlated. We can therefore say that family income and family expenditure, price and demand are correlated.

Correlation can tell us something about the relationship between variables. It is used to understand: 

 a) whether the relationship is positive or negative 

 b) the strength of relationship.

Types of Correlation

According to the number of variables, correlation is said to be of the following three types;

1) Simple Correlation: In simple correlation, we study the relationship between two variables. 

E.g. Income and expenditure, price and demand etc. Here income and price are principal variables while expenditure and demand are secondary variables.

2) Partial Correlation: If in a given problem, more than two variables are involved and of these variables we study the relationship between only two variables keeping the other variables constant, correlation is said to be partial.

3) Multiple Correlations: Under multiple correlations, the relationship between two and more variables is studied jointly. 

In the view of the direction of variation, correlation can be either positive or negetive.

4) Positive Correlation: When the changes in the associated set of phenomena are in the same direction the correlation is positive.

5) Negetive correlation: When the changes in the associated set of phenomena are in the opposite direction the correlation is called negetive.

E.g. When the demand rises, price also rises (positive correlation).

The sale of a commodity decreases when the price of it increases (negetive correlation).

Based upon the constancy of the ratio of change between the variables, correlation can be divided into two.

6) Linear Correlation: Correlation is said to be linear if the amount of change in the one variable tends to bear constant ratio to the amount of change in the other variable.

7) Non-linear Correlation: The correlation is non-linear if the amount of change in one variable does not bear a constant ratio to the amount of change in the other related variable.