Understand the Significance of Correlation in Statistics and Economics

Significance of Correlation in Statistics
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Statistics is an important branch of study that is interrelated with many subjects. Statistical term correlation plays an important part in Economics. Sometimes the statistics problems are associated only with single value; however, some problems have two different values in which one is interrelated with other.

A single value distribution is called Univariate and double value distribution is known as bivariate. Correlation comes under a bivariate distribution. 

What is correlation?

Correlation is a technique in statistics that shows how one variable is related with the other.  Change in anyone variable surely affects the other as they are interrelated. It means two different variables are correlated in relationship when one variable changes with the movements in other in a series. The relationship may consist of two or more than two variables. Each one changes with change in any one in the series. Correlation is a statistical technique that assists in finding out this relationship.

Suppose in a series of two variables height and weight, a change in any one will surely influence the other. In normal condition when value of height goes up, then weight value will surely go up. It is because if you compare a taller man with a shorter one, then weight of the taller man will be more as compare to the shorter one. In statistics a proper series is essential to keep records and any increment or decrement in one variable interchanges values of other automatically.  For more information, please click here.

What is the significance of Correlation?

Before understanding the term in details, it is very important to know what the importance of studying this term is. In practical manner the term has a huge importance because of the following reasons –

  • Variables are related to each other by their nature, degree of relationship and direction. It becomes very difficult to understand, but the study of correlation improves knowledge to get a clear view about the nature and direction as well as relationship.
  • Correlation analysis assists in understanding the exact behavior of some particular economic events. Suppose you determine the factors that evaluate demand regarding a commodity, now the study determines how these factors are associated with that particular commodity and its demand.
  • The study assists in estimating change in any one variable that is related to the change in other variables. This is always significant for variables, and the study regression analysis does the various determinations of values.
  • In business world one of the most important criteria or strategy is decision-making. Correlation helps in understanding this to apply for your business as it diminishes elements of insecurity. It means predictions are done in an excellent way with complete reliability.

Now, it is clear that how correlation is significant for the business world.

What are the different types of correlation?

The vast area of study of correlation is categorized in different fields. Some common and known are as follows –

  • Change in Direction basis – In this category the values of bivariate depends on the direction. There are two different categories of these as –
  • Positive Correlation

In this type direction of all variables go towards a single direction. It means increment in value of one variable will surely increase the value of others. Similarly, decrease in value of one will affect and decrease other’s value too. This is known as direct correlation. For example when income of a person increases, his expenditure also decreases.

  • Negative Correlation

Many times one variable affects other in opposite way. It means one variable increases and other decreases. This is a negative correlation. It is also known as inverse correlation. If you look on the relationship of price and demand, then it will give you a clear vision that when price of a product increases, then its demand decreases.

  • Ratio of different Variables – On this basis the correlation is categorized in two different ways –
  • Linear Correlation

In this type the change in ratio between one and other variables always remain constant. Suppose the ratio between income and expenditure is 10:6 and this remains constant even if there is an increase in the income. So, in this condition, the potting of graph will show a straight line. It means this is a linear correlation.

  • Non –Linear correlation

In this type the ratio does not remain constant in different situation. In case income and expenditure ration is 10: 6 in one condition and 10:8 in other condition, then it will be not in a linear path. It means increase in income may increase in expenditure in the same way ( it can be less or more).  It means, in case of plotting the points on graph, it will not give a straight line. Henceforth, it is also known as Curvilinear.

  • Number of variables basis – This basis indicates that the different types depend on the number of variables. These are –
  • Simple Correlation

When the relationship of correlation takes place between two variables only, then it is a simple correlation. Simply, income and expenses in a family or in a small business.

  • Multiple Correlation

When the involvement of more than two variables takes place, then it is known as a multiple correlation. It may be three or more than that. For example, in case of yielding wheat in one acre, rainfall and the appropriate amount of using fertilizer.

  • Partial Correlation

You can say that this is a combination of both single and multiple. How? In this type the most important two variables will be studied by remaining the other constant. To clear this, you can go with the same example as the two variables wheat yield per acre and fertilizer used come as the prime two by keeping the rainfall normal. It means though there are three variables, but only two are at the prime stage.

Degrees of correlation

What is the importance of measurement of correlation? Degree indicates the exact closeness between the variables. It should be clear that analysis of degree is done through the tool, which is known as correlation coefficient. The degree is measured in quantitative manner. On that basis the different degrees of Correlation are –

  1. Perfect Correlation

If the closeness between two variables depends on the increment and decrement of the variables in same proportion, then it is known as perfect correlation. In this type, there is a same direction or opposite. The two types in this are – Positive and Negative. In case of increasing value of both variables is same, then the ratio r will be positive and known as positive perfect correlation. Its value will be +1.

However, if one variable increases with a value and other deceases with the same value, then their direction will be opposite. At that time, the ratio will be -1.

  • Absence of correlation

If no variables are in any relationship with other, then it is known as absence of Correlation. These are uncorrelated. It means the value of the ratio r will be 0.

  • Limited correlation or limited degree –

In real manner, it is difficult to get perfect correlation, in which r is +1 or -1. Similarly, it is very limited to get uncorrelated variables. So, what type of value is determined? Experts say that the value of r varies and lie between -1 and +1.  If it is closed to perfect one or +1 or -1. If it is close to 0, then it is low degree. However, if it is in between high or low, then it is known as moderate.

Now, it is clear that analysis of correlation explains direction and magnitude.

What are the different methods of measuring correlations?

Various methods are –

  • Scatter Diagram
  • Karl Pearson’s Coefficient
  • Spearman’s rank

Now, students must know that the first one or scatter diagram measures in diagrammatic form.  However, rests two are the processes of evaluation through mathematical representation.

What are the ways of measuring through scatter diagram?

The different ways are –

  • Perfectly Positive
  • Perfectly Negative
  • Positive
  • Negative

These all are different according to the representation of dots along with a particular direction.

Merits of Karl person’s coefficient

The prime two merits are –

  • Exact measure
  • Understanding of direction of correlation

However, there are some limitations in this method, and determination of value is not simple. Along with that extreme values may affect the evaluation.

Rank correlation merits

The prime correlation merits are as follows –

  • This method is simple
  • Suitable for qualitative Data
  • Perfect for quantitative data also
  • Convenient for evaluating ranked data

All these are merits of the rank correlation, but in case of large observations or grouped data this technique will not work.

How this is helpful in study?

When problems in accountancy, statistics, and economics are provided on the basis of large assumptions in case of two or more variables, the technique is appropriate to find out an actual relationship. Thus, any student can easily find out everything in a proper way. A large number of data and variables need to measure.

Evaluations take place as per the mathematical conditions. So, to do that it is important to go through different formulas. This helps in understanding the exact value of degree and rank of coefficient of correlation.

How students need to improve knowledge of correlation?

  • This is an essential part in Statistics as well as Economic measurements. So, if you want to become master in this topic of statistics, then you must understand the requirement, way of measurement and motto of the topic. There are many ways and suitable formula for that.
  • Students can easily improve their knowledge by understanding the fundamentals the topic. A number of questions are provided through assignments. They must solve all questions of each assignment to get a good grip over the subject.
  • Plotting of graph and representations are important through dot or points. So, whenever you have any such questions you must solve it appropriately. Each answer will show your ability of understanding and solving questions.
  • Complex Numerical problems need to understand before solving as any issue may create problem in your solution. There are some steps and you need to go through each step before come to the end point.
  • Practice enhances confidence level and all issues will be clear in very short time. So, always concentrate and understand questions and then solve homework.
  • In case of any difficulty in understanding and solving the problem, students can easily contact with the experts through online to grab the complete answer according to their need. A number of experts through a reliable online tutorial will be the best way to clear doubt anytime.

So, if you really desire to improve your knowledge and you are confused in some extent, then you can easily follow the above steps.

In what level of study you will face this topic?

Statistics is a prime branch of study, and school level students get a number of topics. However, correlation is not very easy to understand and thus introduced at the higher secondary level of study. Students also get this topic in details at the higher level of education as college level and university level. To understand it properly, you must have knowledge of each small term to make your knowledge better in all ways.

Unless you grab knowledge at the lower level, it will increase your difficulty of understanding at the higher level of study.

How online assistance for correlation is suitable?

Online assistance is perfect for all because –

  • Statistics experts provide answers in an exact way.
  • Through online students can easily get solution without any hesitation, no matter how complex these problems are.  
  • Experts always answer in step by step manner to enhance the understanding level of a reader.
  • Any student can easily select a reliable online help solution and an expert to solve the problems as completely affordable rate.
  • Students are free to apply anytime in 24 hours.

So, now you can easily understand the topic correlation and how it is significant. You have the choices of selecting online facility in case you are not confident in any topic or term. A proper way of study will help you a lot in near future.

Author Bio

Guohong Li is a well-known faculty in Statistics. He is a Master of statistics (University of Utah). He is teaching for more than 10 years. He has written many books in statistics and Correlation. He also facilitates students through his online service for homework and assignment solutions. He also associated with a reliable online tutorial company to acknowledge students.