Based on the nature of the relationship between the two variables, correlation can be broadly categorized into the following three types: Positive and Negative Correlation, Linear and Curvilinear Correlation, and Simple and Multiple Correlation.
Two variables are said to be negatively correlated if the two variables move in the opposite direction. In other words, when one variable increases and the other variable falls, the two variables are said to be negatively correlated. For example, in winters as the temperature falls, the demand for room heaters increases. Thus, the demand for room heaters and temperature is negatively correlated. Consider the following two variables A and B.
| A | 10 | 20 | 30 | 40 | 50 | 60 |
| B | 90 | 80 | 70 | 60 | 50 | 40 |
In the above example, as the value of A increases, the value of B decreases. One of the common examples of negative correlation in economics is the price of a commodity and its quantity demanded. As the price of a commodity rises, its demand falls and vice-versa. Similarly, there exists a negative correlation between the interest rate and the demand for loans. As the interest rate rises, the demand for loans falls and vice-versa.
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Types of Correlation
Based on the nature of the relationship between the two variables, correlation can be broadly categorized into the following three types
What is Correlation?
Correlation is a statistical tool that measures the quantitative relationship between different variables. It studies the degree and intensity of the connection between the two variables. The relationship between two variables is studied with the help of a statistical tool i.e. ‘Correlation’.