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.
A positive correlation between two variables exists when both of them move in the same direction. In other words, if with the increase in one variable, the other also increases, and with the decrease in one variable the opposite also decreases then, the 2 variables are said to be positively correlated. For example, in summers as the temperature rises, the demand for soft drinks rises. Thus, the demand for soft drinks and temperatures are positively correlated.
Thus, the demand for soft drinks and temperatures are positively correlated. Consider the following two variables X and Y.
In the above example, as the value of X increases from 10 to 20 to 30 and so on, the value of Y also increases from 15 to 22 to 29 and so on. This suggests a positive correlation between X and Y. In economics, we can cite various examples, where the two variables are positively correlated. For example, there exists a positive correlation between the price of a commodity and its supply. As the price of commodity increases, its supply also increases and as the price decreases, its supply also decreases. Similarly, the income of a consumer and expenditure are positively correlated. As the income increases, the expenditure also increases and vice-versa.
What is a Negative Correlation?
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.
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’.