CBSE Class 11 Economics Correlation Notes Set A

Correlation Analysis: -

1. Meaning of correlation : It studies and measures the intensity of relationship between two or more variables. If the two variables, X and Y change (vary) in such a way that with a change in value of one variable the values of the other variable also change, then they are said to be correlated.

2. Significance of correlation: correlation has immense utility in statistics.

i. It helps in determining the degree of relationship between variables.

ii. We can estimate the value of one variable on the basis of the value of another variable correlation serves the basis of regression.

iii. Correlation is useful for economists. An economist specifies the relationship between different variables like demand and supply, money supply and price level by way of the correlation.

3. Correlation and causation: It measures co-variation, not causation. It shouldnever be interpreted as implying cause and effect relationship between two variables. The presence of correlation between two variables X and Y simply means that when one variable is found to change in one direction, the value of the other variable is found to change either in same direction or in the opposite direction.

4. Positive and Negative Correlation :-Correlation is classified into positive and negative correlation when two variables move in the same direction, i.e. if the value of Y increases ( or decreases) with an increase (or decrease) in the value of X, they are said to be positively related. On the other hand when two variables move in the opposite direction i.e. if the value of variable ‘X’ increase (or decrease) with the decrease or increase in the value of Y variable, they one said to be negatively correlated.

5. Linear and Non- linear correlation:- Correlation may be linear or non-linear . If the amount of change in one variable tends to have a constant relation with the amount of change in the other variable then the correlation is said to be liner. It is represented by a straight line. On the otherhand if the amount of change in one variable does not have constant proportional relationship to the amount of change in the other variable, then the correlation is said to be non-linear or curvi-linear.

6. Simple , multiple and partial correlation :- Correlation may also be simple, multiple and partial correlation. When two variables are studied to determine correlation, it is called simple correlation on the other hand when more than two variables are studied to determine the correlation it is called multiple correlation. When correlation of only two variables is studied keeping other variables constant, it is called partial correlation.

7. Methods of studying correlation :- The correlation between the two variables can be determined by the following three methods:-

(a) Scatter diagram

(b) Karl Pearson’s method of correlation coefficient

(c) Spearman’s method of Rank correlation.  

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