Class 11 Microeconomics: Correlation—Introduction to Correlation and Degrees of Correlation Notes with Explanation

Introduction

Correlation is the single figure that represents the relation between two or more variables.  

It is denoted with the letter ‘r'. The output ranges from +1 to -1:  

- When r = +1, it’s called Perfect Positive Correlation  

- When r = -1, it’s called Perfect Negative Correlation

The Two Types of Correlation

Correlation are of two types:

1. Positive Correlation – When the two variables move in the same direction.  

E.g.:

2. Negative Correlation – When the two variables move in the opposite directions.  

E.g.:

Degrees of Correlation

There are five degrees of correlation:

1. Perfect Correlation
2. High Degree of Correlation
3. Moderate Degree of Correlation
4. Low Degree of Correlation
5. Zero Degree of Correlation

1. Perfect Correlation

• Perfect Positive: When the value is exactly +1
• Perfect Negative: When the value is exactly –1

2. High Degree of Correlation

• High Positive: Between +0.75 and +1
• High Negative: Between –0.75 and –1

3. Moderate Degree of Correlation

• Moderate Positive: Between +0.25 and +0.75
• Moderate Negative: Between –0.25 and –0.75

4. Low Degree of Correlation

• Low Positive: Between 0 and +0.25
• Low Negative: Between 0 and –0.25

5. Zero Degree of Correlation

• Relation cannot be studied
• Hence, the correlation value is 0

E.g.:

Degree Trivia

• A correlation value of 0.99 is a High Degree, not Perfect
• For correlation to exist, variables must move:
  • ↑↑ (up-up)
  • ↓↓ (down-down)
  • ↑↓ (up-down)