UNIT 4 (Chapter: 10,11)
CORRELATION, INTRODUCTION TO INDEX
Q. 1. Choose the correct alternatives :
1. Coefficient of correlation is between :
(a) 0 and +1 (b) –1 and 0 (M. P. 2021, 22)
(c) –1 and +1 (d) None of these.
2. Base year is :
(a) Comparison year (b) Present year
(c) Any year (d) Previous year to present year.
3. It is the characteristic of Index number :
(a) Special type of Index number (b) Expressed in numericals
(c) Base of comparison (d) All of these.
4. Index number measures :
(a) Relation between two variables
(b) Change in related variables in a group
(c) Difference between value of variables
(d) None of these.
5. Present year is :
(a) In which average changes that take place is measured
(b) Reference year of comparison
(c) Next year to base year
(d) Any year
6. Consumer Price Index measures changes in : (NCERT)
(a) Retail price (b) Wholesale price
(c) Producers price (d) None of these.
7. Generally inflation is calculated by : (NCERT)
(a) Wholesale price index (b) Consumer price index
(c) Producer’s price index (d) None of these.
Ans. 1. (c), 2. (a), 3. (d), 4. (a), 5. (a), 6. (a), 7. (b).
Q. 2. Fill in the blanks:
1. For construction of index number __________ formula is ideal.
2. Base year is also called as __________ year.
3. Index number is a measure to show the changes in variable or related __________.
4. Formula __________ was propagated by Fisherman.
5. P₁ is presented in __________ year.
6. Concept of technique of correlation was given by __________. (M. P. 2019)
7. Index number is a __________ measure. (M. P. 2022)
8. __________ are known as Economic Barometer.
9. When two variables change in the same direction such a correlation is called __________.
Ans. 1. Fisher, 2. Reference, 3. Variables, 4. P₀₁ = √(Σp₁q₀ × Σp₁q₁ / Σp₀q₀ × Σp₀q₁), 5. Current year,
6. Prof. Galton, 7. Relative, 8. Index Number, 9. Positive.
Q. 3. Match the columns :
Column A Column B
1. Consumer price index (a) P₀₁ = Σp₁q₀ / Σp₀q₀ × 100
2. Rate of inflation (b) Price of current year × 100
3. Price Ratio (c) A₂ – A₁ / A₁ × 100
4. Lespeyr’s method (d) Cost of living index number
5. Degrees of correlation (e) Dispersion figure
6. Methods of correlation (f) Negative and positive
7. Types of correlation (g) Complete correlation
Ans. 1. (d), 2. (c), 3. (b), 4. (a), 5. (g), 6. (e), 7. (f).
Q. 4. State true or false :
1. Coefficient of correlation is always positive.
2. The correlation is an analysis of variable between two or more variables.
3. In correlation of Karl Pearson Method deviation is found out on the basis of Assumed Mean.
4. If value of coefficient of correlation is +1 then it means relation is complete positive.
5. When there is cause and effect relation between two series it shows high order of correlation.
6. An increasing index number indicates increasing economic activities.
7. Index number measures changes in variables according to time.
8. In weighted index weights are assigned to various items according to their relative value.
9. Simple index is measured on the basis of simple grouping method.
10. Inflation is measured on the basis of wholesale index.
Ans. 1. False, 2. True, 3. False, 4. True, 5. False, 6. False, 7. True, 8. True, 9. False, 10. True.
Q. 5. Give answer in one word/sentence:
1. The value of correlation coefficient falls between 0·75 and 1 is called ?
2. What is the range of simple coefficient of correlation ?
3. If rxy is positive then what will be relation between x and y ?
4. What is the index number called which tells the relative importance of items.
5. What is called Economic Barometers ?
Ans. 1. High correlation, 2. –1 to +1, 3. When y increases then x increases, 4. Weighted index number,
5. Index number.
Very Short Answer Type Question
Q. 1. Write the meaning of correlation. (M. P. 2019)
Ans. Correlation is the relation between two variables. In other words it shows the interdependency of
two variables. Correlation between two variables may or may not be inter-related. For example, sale
of mobile sets with respect to the daily climate and temperature. This is an example of unrelated
correlation.
Long Answer Type Questions
Q. 1. Write the merits and demerits of Karl Pearson’s coefficient of correlation.
Ans.
Following are the merits and demerits of Karl Pearson’s coefficient of correlation :
Merits :
1. Popular method – It is the most commonly used method to measure the relationship between
two variables.
2. Easy interpretation – It gives clear and meaningful numerical results.
3. Shows direction – It shows whether the relationship is positive or negative.
4. Shows degree of relationship – It indicates whether the relationship is high, moderate or low.
Demerits :
1. It is affected by extreme or marginal values.
2. Calculation is lengthy and time-consuming.
3. Values lie only between +1 and –1, so careful calculation is required.
Q. 2. Write the importance of correlation.
Ans. The importance (significance) of correlation is as follows :
1. Correlation shows the relationship between two variables.
2. The value of correlation lies between –1 and +1.
3. Positive correlation shows variables move in the same direction.
4. Negative correlation shows variables move in opposite directions.
5. +1 or –1 indicates perfect correlation.
6. Zero correlation means no relationship between variables.
Q. 3. Explain the linear and non-linear correlation.
Ans. Meaning : Refer Long Ans. Type Question 10 point 2.
Correlation can be found out on the basis of lines in the following way :
(1) If both the lines are moving in the same direction then it shows the positive correlation.
(2) If both the lines are on opposite direction then it indicates the negative correlation between both
variables.
(3) If both the lines are not in a specific direction then correlation is zero.
Q. 4. Explain the Spearman’s Rank Difference Method.
Ans.
Spearman’s Rank Difference Method was introduced by Charles Spearman in 1904. This method is
used to find correlation when data is qualitative or cannot be measured in exact numerical form.
In this method, ranks are given to the values of both variables. Ranks of X-series are denoted by R₁
and ranks of Y-series by R₂. The difference between ranks (D = R₁ – R₂) is calculated, then D² is
found. The sum of squares of differences is written as ΣD².
The coefficient of correlation is calculated by the formula :
6Σ𝐷 2
𝑟𝑠 = 1 −
𝑁3 − 𝑁
Where :
ΣD² = Sum of squares of rank differences
N = Number of pairs of observations
Methods of calculation :
(i) When ranks are given :
Find the difference between R₁ and R₂, square it, add all D² and apply the formula.
(ii) When ranks are not given :
First allot ranks to both series in ascending or descending order (same order for both series). Then
find D, D², ΣD² and apply the formula.
Q. 5. The consumer price index for the June, 2005 was 125, the food index was 120 and that of
other items 135, what is the percentage of the total weightage given to food?
Ans. Given : In June 2005 food index was = 120. In June 2005 index of other items was = 135.
Thus, in June total index was = 120 + 135 = 255
Total weightage given to food in 2005
= Food index / Total × 100
= 120 / 255 × 100 = 47·06%
Thus in June weightage given to food was 47·06% of total weightage.
Q. 6. What is index number? What is its importance in statistics?
Ans.
An index number is a special type of average which shows the change in a group of related items
over a period of time.
Importance of Index Number :
1. Simplifies complex data – It presents large and complicated information in an easy and
understandable form.
2. Helpful in policy making – Government and business use index numbers to frame economic and
price policies.
3. Measures purchasing power of money – It helps in knowing the value of money and fixing
wages.
4. Useful in forecasting – Index numbers help in studying trends and making future estimates.
Q. 7. In a city following information was found from middle class family budget. What will be
index in 2004 as compared to 1995? (NCERT)
Ans.
This question is solved by Weighted Average of Price Relatives Method.
Σ𝑅𝑤
Formula : Index =
Σ𝑤
𝑝
Where, 𝑅 = 𝑝1 × 100
0
Calculation Table :
Item p₀ (1995) p₁ (2004) R w Rw
Food items 1400 1500 107.14 35 3749.9
Fuel 200 250 125 10 1250.0
Clothes 500 750 150 20 3000.0
Rent 200 300 150 15 2250.0
Various 250 400 160 20 3200.0
Σ𝑤 = 100, Σ𝑅𝑤 = 13449.9
Index Number:
𝟏𝟑𝟒𝟒𝟗. 𝟗
Index = = 𝟏𝟑𝟒. 𝟓𝟎
𝟏𝟎𝟎
Thus, the price index for 2004 as compared to 1995 is 134.5.
Q. 8. What problems have to be faced while calculating index number?
Ans. Following are the main problems in calculating index numbers :
1. Selection of base year – No year is completely normal, so choosing a suitable base year is
difficult.
2. Selection of goods – It is difficult to select representative goods because consumer habits
change.
3. Collection of prices – Prices may differ at different places and it is difficult to decide
between retail and wholesale prices.
4. Problem of weights – Giving proper weights to goods is difficult as importance differs for
different people.
Q. 9. Throw light on the characteristics of index number.
Ans.
The main characteristics of index numbers are as follows :
1. Special type of average – Index number is a special average used for comparison of related
data.
2. Expressed in percentage – Index numbers are always expressed in percentage form. Base
year index is taken as 100.
3. Expressed in numbers – Changes shown by index numbers are always numerical, not
descriptive.
4. Relative measure – Index numbers show relative changes, not absolute changes.
5. Basis of comparison – Comparison is made on the basis of time or place.
Q. 10. Explain the types of correlation.
Ans. The main types of correlation are as follows :
1. Positive and Negative Correlation
Positive correlation – When both variables move in the same direction, correlation is positive.
Example: Price and supply of a commodity.
Negative correlation – When variables move in opposite directions, correlation is negative.
Example: Price and demand of a commodity.
2. Linear and Non-linear Correlation
Linear correlation – Change in variables is uniform and graph forms a straight line.
Non-linear correlation – Change is not uniform and graph forms a curve.
3. Simple and Multiple Correlation
Simple correlation – Relationship between two variables only.
Example: Price and demand.
Multiple correlation – Relationship among more than two variables.
Example: Agricultural output, rainfall and fertilizer.
4. Perfect Positive and Perfect Negative Correlation
Perfect positive correlation – Variables change in the same proportion and direction.
Perfect negative correlation – Variables change in same proportion but opposite direction.
5. No Correlation
When there is no relationship between variables, it is called zero or no correlation.
Q. 11. Find out coefficient of correlation with this data.
X 12 9 8 10 11 13 7
Y 14 8 6 9 11 12 3
Solution :
X-series
X-item (X) Deviation from Arithmetic mean dx (10) Square of deviation (dx²)
12 +2 4
9 −1 1
8 −2 4
10 0 0
11 +1 1
13 +3 9
7 −3 9
ΣX = 70 Σdx² = 28
Y-series
Y-item Deviation from Arithmetic Square of Product of deviation from X
(Y) mean dy (9) deviation (dy²) and Y series (dxdy)
14 +5 25 10
8 −1 1 1
6 −3 9 6
9 0 0 0
11 +2 4 2
12 +3 9 9
3 −6 36 18
ΣY = 63 Σdy² = 84 Σdxdy = 46
Formula :
r = Σdxdy / √(Σdx² × Σdy²)
or,
r = 46 / √(28 × 84)
or,
r = 46 / √2352
or,
r = 46 / 48.49
or,
r = + 0.948 approximately
Positive relation between X and Y series.
Q. 12. Calculate the Spearman’s correlation coefficient from the following data.
X-variable 10 12 8 15 20 25 40
Y-variable 15 10 6 26 16 12 8
Solution :
X-series
X-item Deviation from assumed mean dx (20) Square of deviation (dx²)
10 −10 100
12 −8 64
8 −12 144
15 −5 25
20 0 0
25 +5 25
40 +20 400
Σdx = −10
Σdx² = 758
Y-series
Y- Deviation from assumed Square of deviation Product of deviation of X and Y
item mean dy (12) (dy²) series (dxdy)
15 +3 9 −30
10 −2 4 16
6 −6 36 72
26 +14 196 −70
16 +4 16 0
12 0 0 0
8 −4 16 −80
Σdy = 9
Σdy² = 277
Σdxdy = −92
N=7
Formula :
Σ𝑑𝑥Σ𝑑𝑦
Σ𝑑𝑥𝑑𝑦−
r= 𝑁
(Σ𝑑𝑥)2 2 (Σ𝑑𝑦)
2
√(Σ𝑑𝑥 2 − )(Σ𝑑𝑦 − )
𝑁 𝑁
or
(−10×9)
−92−
r= 7
2
( −10) (9)2
√(758− )(277− )
7 7
or
90
−92+
r= 7
100 81
√(758− )(277− )
7 7
or
−79.14
r=
√[743.72][265.43]
or
−79.14
r=
√197405.5
or
r = −79.14 / 444.30 approximately
or
r = −0.178
Low order negative correlation.
Q. 13. Find out coefficient of correlation by rank difference method :
X: 75 88 95 70 60 80 81 50
Y: 120 134 150 115 110 140 142 100
X- X-Order of Y- Y-Order of Difference of order (R₁ Square of
Series series (R₁) Series series (R₂) − R₂) = D D²
75 5 120 5 0 0
88 2 134 4 −2 4
95 1 150 1 0 0
70 6 115 6 0 0
60 7 110 7 0 0
80 4 140 3 +1 1
81 3 142 2 +1 1
50 8 100 8 0 0
N=8
ΣD² = 6
Formula :
6Σ𝐷2 6(6) 36 36
rₛ = 1 − =1− =1− =1− = 1 − 0.07 = +0.93
𝑁(𝑁2 −1) 8(82 −1) 8(64−1) 504
High order positive correlation between X and Y series.
Ans.
Q. 14. Prepare an index number for the following number by price relative mean method by
taking 1988 as base year for 1989 :
Goods A B C D E
Price (1988) 12 25 10 5 6
Price (1990) 15 20 12 10 15
Solution: Finding out relative price index by Mean Method :
Goods Price (1988) P₀ Price (1989) P₁ Price (Price relative) P₁/P₀ × 100
A 12 15 15/12 × 100 = 125
B 25 20 20/25 × 100 = 80
C 10 12 12/10 × 100 = 120
D 5 10 10/5 × 100 = 200
E 6 15 15/6 × 100 = 250
N=5
Σ (P₁ / P₀ × 100) = 775
Formula :
𝑃1
Σ( ×100)
𝑃0
P₀₁ =
𝑁
P₀₁ = 775 / 5
∴ P₀₁ = 155
Ans.
Q. 15. Find out index number of Fisher :
Year Rice Rice Wheat Wheat Jowar Jowar
(Price) (Quantity) (Price) (Quantity) (Price) (Quantity)
1985 4 50 3 10 2 5
1986 10 40 8 8 4 4
Solution : Calculation of index number by Fisher :
Goods Year 1985 P₀ q₀ Year 1986 P₁ q₁ P₀q₀ P₁q₀ P₀q₁ P₁q₁
Rice 4 50 10 40 200 500 160 400
Wheat 3 10 8 8 30 80 24 64
Jowar 2 5 4 4 10 20 8 16
ΣP₀q₀ = 240
ΣP₁q₀ = 600
ΣP₀q₁ = 192
ΣP₁q₁ = 480
Here,
Σ𝑃 𝑞 Σ𝑃 𝑞
P₀₁ = 100 × √Σ𝑃1 𝑞0 × Σ𝑃1 𝑞1
0 0 0 1
= 100 × √(600/240 × 480/192)
= 100 × √(288000 / 46080)
= 100 × √6.25
= 100 × 2.5
∴ P₀₁ = 250
Q. 16. What are the limitations of index number ?
Ans. The limitation of index numbers are as follows :
a. Index numbers are based on sample data, so they give only approximate results and may not show
exact changes.
b. Errors may occur while constructing index numbers due to wrong selection of data or method.
c. It is difficult to measure changes in the quality of goods and services through index numbers.
d. There is no single index number method that is universally accepted.
e. Index numbers can be misused by dishonest persons to support their own interests.
Q. 17. Throw light on importance of consumer price index.
Ans. The importance of consumer price index is :
1. It is used to determine the purchasing power of money and real wages.
2. It is also used to analyze the market of specific commodities.
3. It helps to formulate government policies.
4. It helps in estimation of national income.
5. Cost of living index numbers are used as basis for the wage adjustments.
Q. 18. Explain any four importance of Index Number.
Ans. Four importance of Index Number are:
1. Helps in policy making: Index numbers provide useful information for framing economic
policies. Banks fix interest rates, insurance companies fix premiums, and railways fix fares
with the help of index numbers.
2. Simplifies complex facts: Index numbers make difficult and scattered data easy to
understand by presenting them in a simple numerical form.
3. Helps in comparison: Index numbers show changes in relative terms, making comparison
between different periods or items easy.
4. Indicates future trends: Index numbers help in predicting future economic trends on the
basis of present and past data.