Significance of Correlation

The study of correlation is of immense use in practical life. Correlation analysis contributes to the understanding of economic behavior, 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, sales, 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 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.