Page 134 - DECO504_STATISTICAL_METHODS_IN_ECONOMICS_ENGLISH

Statistical Methods in Economics Hitesh Jhanji, Lovely Professional University

Notes Unit 9: Correlation: Definition, Types and

its Application for Economists

CONTENTS
Objectives
Introduction
9.1 Definition and Types of Correlation
9.2 Application of Correlation for Economists
9.3 Summary
9.4 Key-Words
9.5 Review Questions
9.6 Further Readings

Objectives

After reading this unit students will be able to:
• Know Correlation and Types of Correlation.
• Discuss the Application of Correlation for Economists.

Introduction

Correlation means a relation between two groups. In statistics, it is the measure to indicate the
relationship between two variables in which, with changes in the values of one variable, the values of
other variable also change. These variables may be related to one item or may not be related to one
item but have dependence on the other due to some reason. For example, the data on height and
weights of a group of people would relate to each member of the group but prices of sugar and
sugarcane are two different series altogether but there would be some relation between the values of
the two, prices of sugar depending upon the prices of sugarcane. This technique provides a tool into the
hands of decision-makers because it provides better understanding of the trends and their dependance
on other factors so that the range of uncertainities associated with decision-making is reduced.
9.1 Definition and Types of Correlation

Definition of Correlation
The term correlation indicates the relationship between two variables in which with changes in the
value of one variable, the values of the other variable also change. Correlation has been defined by
various eminent statisticians, mathematicians and economists. Some of the important definitions of
correlation are given below:
(1) According to La Yun Chow, “Correlation analysis attempts to determine the degree of relationship
between variables.”
(2) As per W. I. King, “Correlation means that between two series or groups of data there exists
some casual connections. ....... If it is proved true that in a large number of instances two variables
tend always to fluctuate in the same or in opposite directions, we consider that the fact is
established and that a relationship exists. This relationship is called correlation.”
(3) In the words of L. R. Conner, “If two more quantities vary in sympathy so that movements in
the one tend to be accompanied by corresponding movements in the other/others then they are
said to be correlated.

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