CORRELATION

In a bivariate frequency distribution (or bivariate series) if the change in one

variable appears to be accompanied by a change in the other variable and vice-
versa the two variable are said to be correlated and this relationship is called
correlation or covariation.
Type of Correlation:
Positive Correlation:-
When the increase / Decrease in one variable result in a corresponding
increase / Decrease in the other the correlation is said to be !ositive/direct
correlation. "or e.g. #he volume and temperature of a gas are positive
correlated.
Negative Correlation:-
When the increase/ decrease on one variable result in a corresponding decrease
/ increase in the other the correlation is said to be negative or inverse
correlation. "or e.g. #he volume and pressure of a gas is negative correlation.
Karl Pearsons Coefficient of Correlation (r:-

2
2
1
1
) (
1
. ) (
1
) ( ) (
1
y y
n
x x
n
y y x x
n
r
i
n
i
i
i
n
i
i
$%

2
2
1
1
) ( . ) (
) ( ) (
y y x x
y y x x
r
i
n
i
i
i
n
i
i
$%
( )( )
( ) ( )
1
1
]
1

'

'

n
y
y
n
x
x
n
y x
xy
r
2
2
2
2
&tep Deviation 'ethod(
When the values of ) and y are numerically high.
N.P.Singh(RATM) B.Statistics (015) 1
( )( )
( ) ( )

2 2
. v v u u
v v u u
r
$%
( )( )
( ) ( )

2
2
2
2
. v v n u u n
v u uv n
r
*orrelation In grouped &eries(-
In case of a bivariate frequency distribution formula used is(
( )( )
( ) { } ( ) { } [ ]

2
2
2
2
fv fv N fu fu N
fv fu fuv N
r
Where(-
h
A x
u

and
k
B y
v

!ses" #erits an$ %e&erits:-

#he following are the main uses of the scatter diagram(
+. #he scatter diagram gives an idea at a glance about the e)istence or
absence of relationship between two variables.
,. It also e)hibits the type of the correlation.
-. It indicates the presence of perfect positive or perfect negative correlation.
.. #he scatter diagram helps in the significance or interpretation of the
concept of correlation.
T'e &ain $ra()ac*s of scatter $iagra& are:
+. It does not indicate a definite measure of the degree of correlation.
,. In case of few observations the use of scatter diagram is limited.
-. /owever with nominal degrees of variation it fails to ascertain the perfect
of negative correlation.
Properties of correlation coefficient:
+. It is rigidly defined.
,. #he linear correlation coefficient xy
r
is a pure number (or ratio) and thus
has no unit of measurement. 0y symmetry it is clear that yx xy
r r
.
-. #he correlation coefficient r is independent of the change of origin and
scale.
.. It is based on all the observation of the given variables.
N.P.Singh(RATM) B.Statistics (015) 2
1. It varies between -+ to 2+.
Ran* Correlation(
#he correlation between the ran3s of a group of n individuals arranged in order of
merit or proficiency in the possession of two characteristics is called ran3
correlation.
+pear&ans coefficient of Ran* Correlation :-
r s 4
) 1 (
6
1
2
2

n n
d
Where d4)-y
5ote( if the ran3 of different observations is same than use the following formula(
( )( )
( ) ( )
1
1
]
1

'

'

n
R
R
n
R
R
n
R R
R R
r
y
y
x
x
y x
y x
s
2
2
2
2

RE,RE++ION ANAL-+I+
Regression:
6ccording to 0lair 7%egression is the measure of the average relationship
between two or more variables in terms of the original units of the data.8
Regression Analysis:
7&tatistical techniques which attempts to establish the nature of the relationships
between variable i.e. to study the functional relationship between the variables
and thereby provide a mechanism for prediction and forecasting is 3nown as
regression analysis.8
9inds of regression 6nalysis
:inear %egression( If the relationship can be represented by a straight line than
it is 3nown as linear regression. In this case the values of the dependent variable
changes at a constant rate for a unit change in the values of the independent
variable.
N.P.Singh(RATM) B.Statistics (015) 3
Non Linear Regression: When the relationship between variables can be
represented by a curve other than straight line then it is called non-linear
regression.
+i&ple Regression: If the study is based only on two variables it is called
simple regression.
#.ltiple Regression: If the study is based on more than two variables it is
called multiple regression.
Regression E/.ations:
6 regression model is a mathematical equation that provides prediction of value
of dependent variable based on 3nown values of one or more independent
variables.
E/.ation of regression line of - on 01
( ) x x b y y
yx

Where yx
b
is coefficient of regression of Y on .
y
y
yx
r b

( ) ( )
( )
2
x x
y y x x
b
i
i i
yx

( )( )
( )

2
2
x x
y x y x
yx
d d n
d d d d n
b
E/.ation of regression line of 0 on -1
( ) y y b x x
xy

Where yx
b
is coefficient of regression of Y on .
y
x
xy
r b

( ) ( )
( )
2
y y
y y x x
b
i
i i
xy

N.P.Singh(RATM) B.Statistics (015) !
( )( )
( )

2
2
y y
y x y x
xy
d d n
d d d d n
b
Note: #he geometric mean of the regression coefficient is equal to r (coefficient
of correlation).
r b b
xy yx

2.nction or .ses or Applications of Regression Line3 E/.ation:
+. Indicate the relationship between two variables.
,. Indicate the nature and degree of correlation.
-. 'a3e the best estimate of one variable based on the other variable.
.. #o obtain ratio of variation of a particular point.
1. #o measure of change in one variable with a unit changes in the other
variable.
Ti&e +eries analysis
#ime series is a series of value ta3en by a variable at price production sales
demands supply import e)port etc. of a commodity of different times are time
series.
e.g. of time series which has all the characteristics of time series but time is not a
variable.
+. Depth of a river at different distance.
,. &peed of a train at different points.
Co&ponent of Ti&e +eries:
+. #rend or &ecular #rend.
,. &easonal variations.
-. *yclical variation.
.. Irregular variation.
Tren$ an$ +ec.lar Tren$(- #rend is the tendency of the data to increase of
decrease over a long period of time. #he term long period of time can not be
defined precisely. It depends upon the nature of the data. In some cases it may
be as not as ,; years. While in other cases it may be as long as +;;; years or
even more.
#he increase or decrease in the value of the variable should be
gradnal and steady. &udden and frequent charges are inconsistent with the idea
of trend. <.g. of time series where trend can be found are population of India.
0and deposits production of cement etc.
N.P.Singh(RATM) B.Statistics (015) 5
+easonal 4ariations: - &easonal variations are those variations which repeat
themselves almost at specified with in a year. #hese variations are generally due
to change in seasons. &easonal variations can be found only in such time series
where the interval of time is less than one year.
e.g. of time series where the seasonal variations can be found are quarterly price
of wheat price of vegetables wee3ly sales of general stores sells of ice-cream
and cold drin3s sells of woolen clothes etc.
Cyclical variations: - #he period of cyclical variations is more than the period of
seasonal variations but less than the period of trend. #he period of cyclical
variations is generally from 1 to +, years. #hese variations are quite often found
in trade and business. #hese are periods of boom and recession in almost
every trade and business which are 3nown as business cycles cyclical variations
are very often found in prices of shares.
Irreg.lar 4ariations(- 0esides regular movements in a time series there are
fluctuations which occur quite suddenly. #hese fluctuations can not be predicate
in advance and are generally due to natural climates such as fire draught
earthqua3e war etc.
#o$els of Ti&e +eries(-
#.ltiplicative #o$el:
#he actual values of a time series represented by = can be found by multiplying
four components at a particular time period. #he effect of four components on the
time series is interdependent. #he multiplicative time series model is defined as(
I S C T Y
A$$itive #o$el:-
In this model it is assumed that the effect of various components can be
estimated by adding the various components of a time series. It is states as(
I S C T Y + + +
/ere * & and I are absolute quantities and can have positive or negative values.
It is assumed that these four components are independent of each other.
/owever in real-life time series data this assumption does not hold good.
Tren$ Analysis
#et'o$ of Least +/.are:-(first $egree
:et n
bx a y +
-----------------------( i )
0e the equation of trend line where >a? and >b? are constants.
N.P.Singh(RATM) B.Statistics (015) 6
We find the values of >a? and >b? by the method of least square.
5ormal equations to find the values of >a? and >b? are.

+ x b na y
------------------- ( ii )

+
2
x b x a xy
--------------( iii )
#et'o$ of least s/.are (Non-linear +econ$ $egree para)ola:
:et n
2
cx bx a y + + -----------------------( i )
5ormal equations are(

+ +
2
x c x b na y
-----------------(ii)

+ +
3 2
x c x b x a xy
------------(iii)

+ +
! 3
2
2
x c x b x a y x
-------(iv)
Where a b and c the constant.
IN%E0 N!#5ER
Inde) numbers measures the relative changes in the value of a variable or a
group of related variables at two different time or places.
Inde) 5umber
100
"a#$e Perio% Base
"a#$e Perio% &$rrent

4
100
0
1

p
p
#ypes of Inde) 5umbers(-
+. !rice Inde) 5umber
,. @uantity Inde) 5umber
-. Aalue Inde) 5umber
!rice Inde) 5umber(- these inde)es are of two categories(
&ingle price inde)
Co&posite price in$e6
+ingle Price In$e6: - #he single price inde) measures the percentage change in
the current price per unit of a product to its base period price.
Co&posite price in$e6( - 6 composite price inde) measures the average price
change for a bas3et of related items from a base period to the current period.
7.antity In$e6( - 6 quantity inde) measures the relative changes in quantity
levels of a group of items consumed or produced such as agricultural and
N.P.Singh(RATM) B.Statistics (015) '
industrial production imports and e)ports between two time periods. #he
method of construction quantity inde)es is the same as that of price inde) e)cept
that the quantities are very from period to period.
#he two most common quantity inde)es are the weighted relative of
aggregates and the weighted average of quantity relative inde).
4al.e In$e6( - 6 value inde) measures the relative changes in total monetary
worth of an item such as inventories sales or foreign trade between the current
and the base periods. #he value of an item is determined by multiplying its unit
price by the quantity under consideration. #he value inde) can be used to
measure differences in a given variable in different locations. <.g. the
comparative cost of living show that in terms of cost of good and services it is
cheaper to live in a small city than in metro cities.
C'aracteristics of in$e6 n.&)ers(
+. <)pressed in numbers( Inde) number represent the relative changes such
as production is increased price are down etc. in numbers.
,. &pecialiBed averages( Inde) number represents a special case of an
average in general a weighted average. It is special type of average
because whereas in a simple average the data are homogeneous having
the same unit of measurement they average variables having different
units of measurement.
-. <)press in !ercentage( Inde) numbers are e)pressed in terms of
percentages so as show the e)tent to relative change where the value of
base is assumed to be +;; but the sign of percentage (C) is not used.
.. 0asis of comparison( Inde) numbers by their very nature are comparative.
#hey compare changes overtime or between places or li3e categories.
1. %elative 'easure( Inde) numbers measures measure changes which are
not capable of direct measurement.
!ses of In$e6 N.&)ers(
+. &implify data( Inde) numbers provide a means of simplifying data that is of
reducing comple) forms of measurement to simple numbers which reflect
the changes in the variable.
,. *omparative &tudy( With the help of the inde) numbers measurement
ta3en at various point of time of space are readily compared in respect to
relative change. #hey combine units of dissimilar nature into one
meaningful value.
-. 'easure !urchasing power of money( Inde) numbers measure the
purchasing power of money. #he purchasing power of money indicates
the economic set-up of country.
.. %elative trends and tendencies( Inde) numbers reveal trends and
tendencies and are helpful in forecasting the future economic trends.
1. !rovided Duidelines to economic policy and informulating decisions( Inde)
numbers are used to determine dearness allowance bonus etc.
N.P.Singh(RATM) B.Statistics (015) (
E. 5ational Income( #he Inde) 5umbers of business conditions measure the
changes in the general economic activity of a country and give an idea
about the fluctuation in the real national income.
Co&parative &erits-$e&erits of fi6e$ )ase an$ c'ain )ase &et'o$(
2i6e$ 5ase -ear:
+. It remains same for all the years.
,. #he inclusion and e)clusion of commodities is not easy.
-. &election of a normal year is a problem.
.. "i)ed base method is good for studying long time changes.
1. It is easy to calculate.
E. #he fi)ed base inde) becomes out model on account of the changes in
habits and tastes of persons etc.
C'ain 5ase -ear:
+. It changes with every year.
,. 5ew commodities can be included and old one can be debted easily.
-. #here is no problem of selection.
.. *hain base method is not good for studying the long time changes.
1. It involves lengthy calculations.
E. #his is not case with chain base inde).
2or&.las for In$e6 N.&)er(
:aspeyre?s !rice Inde) 5umber(
100
0 0
0 1
01

q p
q p
L
P
:aspeyre?s @uantity Inde) 5umber(
100
0 0
0 1
01

p q
p q
Q
!aache?s !rice Inde) 5umber(
100
1
1 1
01

q p
q p
P
o
P

N.P.Singh(RATM) B.Statistics (015) )
!aache?s @uantity Inde) 5umber(
100
1
1 1
01

p q
p q
Q
o
'arshall-<dgeworth?s !rice Inde) 5umber(
100
1 0 0 0
1 1 0 1
01

+
+

q qp q p
q p q p
M
P
'arshall-<dgeworth?s @uantity Inde) 5umber(
100
1 0 0 0
1 1 0 1
01

+
+

p q p q
p q p q
M
P
Dorbish F0owley?s !rice Inde) 5umber(
100
2
1
1 0
1 1
0 0
0 1
01

,
_

q p
q p
q p
q p

P
"isher !rice Inde) 5umber(
100
1 0
1 1
0 0
0 1
01

q p
q p
q p
q p
!
p
"isher @uantity Inde) 5umber(
100
1 0
1 1
0 0
0 1
01

p q
p q
p q
p q
!
p
#est of a good Inde) number
Ti&e Reversal test:
#ime reversal test was developed by Irwing "isher from the view point that an
inde) number should wor3 both ways (bac3ward or forward) with respect to
time. 6ccording to him 7If a formula for constructing an inde) number is such
that it will give the same ratio between one point of comparison and the other
no matter which of the two is ta3en as base then formula is said to have
obeyed the time reversal test.
N.P.Singh(RATM) B.Statistics (015) 10
1
10 01
p p
$r
( )
2
10 01
100 p p
2actor Reversal Test:
#he factor reversal test was developed by Irwing "isher to e)tend the
logical property.
100
01 01 01
" Q p
(or neglecting the factor +;;)

0 0
1 1
01
q p
q p
"
Circ.lar Test:
#his is an e)tension of time reversal test. 6n inde) number formula is said
to satisfy the circular test if the time reversal test is satisfied through a
number of intermediate years.
1
30 23 12 01
p p p p
or ( )
!
100
N.P.Singh(RATM) B.Statistics (015) 11