Page 137 - DECO504_STATISTICAL_METHODS_IN_ECONOMICS_ENGLISH

Unit 9: Correlation: Definition, Types and its Application for Economists

prices has been tested in this way by Dr. E. W. Kemmerer. Dr. Kemmerer builds up the following Notes
price equation:
MR+CR
P s = NE+N E c
cc
in which:

P s = the average price (weighted by the total flows) of all commodities sold for money
and deposit currency during a unit of time.

M = the total currency in circulation during ⎫
the unit of time ⎪
⎪
R = the average number of times each unit of ⎬ = the flow of currency
⎪
currency changes hands during the unit of time. ⎪
⎭
NE = the flow of goods exchanged for currency.

C = the volume of deposit currency exchanged ⎫
for goods. ⎪
⎪
R = the average rate of turnover of such deposit ⎬ = flow of deposit currency.
⎪
c
currency. ⎪
⎭
N E = the flow of goods exchanged for deposit currency.
c c
Dr. Kemmerer then attempts to find the answer that facts give to the following questions:
1. Do the bank reserves vary directly with the money supply ?
2. Does the proportion of bank reserves to check circulation vary directly with the degree of business
distrust existing in the country ?
3. Is “a relative increase in the circulating media accompanied by a corresponding and
proportionate increase in general prices and a relative decrease in the circulating media, by a
corresponding and proportionate decrease in general prices,” or, in the language of the formula,
is
MR+CR
P s = NE+N E c
cc
borne out by the facts ?
All of the questions to be tested by the statistics collected are questions of correlation. Dr. Kemmerer
makes the tests graphically, as has been stated, by comparing the fluctuations of the two curves
based upon the pair of series of statistics being considered. The charts presented by Dr. Kemmerer
from which his conclusions are drawn are given below.
In the case of the correlation of bank reserves and money in circulation, inclusive of bank reserves,
Dr. Kemmerer concludes, “There can be no question but that when due allowance is made for
fluctuations in business confidence, the evidence of Chart I strongly supports the contention that
there exists a close relationship between the amount of money in circulation and the amount of the
country’s bank reserves.” In the case of the correlation of business distrust and the ratio of bank
reserves to check circulation the conclusion is, “the chart substantiates the contention . . . that the
ratio of check circulation to bank reserves is a function of business confidence . . . “The final test of the
quantity theory is the amount of correlation between the figures for the right and left-hand sides of
MR+CR
P
the equation s = c .
NE+N E
cc

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