SIGNIFICANCE OF THE STUDY OF CORRELATION

The study of correlation is of immense use in practical life because of the following reasons:

1. Most of the variables show some kind of relationship. For example, there is relationship between price and supply, income and expenditure, etc. with the help of correlation analysis we can measure in one figure the degree of relationship existing between the variables.

2. Once we know that two variables are closely related, we can estimate the value of one variable given the value of another. This is done with help of regression analysis. 

3. Correlation analysis contributes to the understanding of economic behaviour, aids in locating the critically important variables on which others depend, may reveal to the economist the connection by which disturbances spread and suggest to him the paths through which stabilizing forces may become effective.

In business, correlation analysis enables the executive to estimate costs, prices and other variables on the basis of some other series with which these costs, sales, or prices may be functionally related. Some of the guesswork can be removed from decisions when the relationship between a variable to be estimated and the one or more other variables on which it depends are close and reasonably invariant.

However, it should be noted that coefficient of correlation is one of the most widely used and also one of the most widely abused statistical measures. It is abused in the sense that one sometimes overlooks the fact that correlation measures nothing but the strength of linear relationship and that it does not necessarily imply a cause- effect relationship.

4. Progressive development in the methods of science and philosophy has been characterized by increase in the knowledge of relationships or correlations. In nature also one finds multiplicity in interrelated forces.

5. The effect of correlation is to reduce the range of uncertainty. The prediction based on correlation analysis is likely to be more reliable and near to reality.

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