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**Q.1. Define correlation. Ans.** Correlation is a statistical measure that shows the degree to which two or more variables fluctuate in relation to one another.

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(i) Scatter diagram

(ii) Karl Pearson’s Coefficient of Correlation

(iii) Spearman’s Rank Correlation

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(i) Positive Correlation: In positive correlation, two variables move in the same direction, that is, when one increases, the other also increases and when one decreases, the other also decreases.

(ii) Negative Correlation: In negative correlation, two variables move in the opposite direction, that is, when one increases, the other decreases and when one decreases, the other increases.

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(i) Formation and Testing of Economic Laws: Correlation helps to study the relationship between various economic variables and hence, test the economic laws and principles. For example, the law of demand explains that when price of commodity increases, demand decreases and if price decreases, demand increases.

(ii) Studying Economic Problem: Correlation can be used to find out the cause behind an economic problem by explaining the reasons that are associated with the problem. For example, does price increase or decrease with rise is inflation. This problem can be tested with the help of correlation.

(iii) Formation of Policy: With the help of results derived from correlation, national policies can be formulated to deal with economic problems. For example, correlation can find out the reason behind the bounce in the prices. The government can formulate policies accordingly to curb price rise.

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(i) It is a very simple method of studying correlation between two variables.

(ii) It indicates the relation between variables by giving just a glance.

(iii) This method is not affected by extreme values in the data.

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(i) A scatter diagram does not measure the precise extent of correlation.

(ii) It is not a quantitative measure of the relationship between the variables.

(iii) The relationship between more than two variables cannot be shown using scatter diagram.

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