What is the Pearson Correlation Coefficient?

//What is the Pearson Correlation Coefficient?
What is the Pearson Correlation Coefficient? 2017-10-09T05:09:27+00:00

Definition: The Pearson correlation coefficient, also called Pearson’s R, is a statistical calculation of the strength of two variables’ relationships. In other words, it’s a measurement of how dependent two variables are on one another.

What Does Pearson Correlation Coefficient Mean?

What is the definition of Pearson Correlation Coefficient? The Pearson product-moment correlation coefficient depicts the extent that a change in one variable affects another variable. This relationship is measured by calculating the slope of the variables’ linear regression.

The value of Person r can only take values ranging from +1 to -1 (both values inclusive). If the value of r is zero, there is no correlation between the variables.

If the value of r is greater than zero, there is a positive or direct correlation between the variables. Thus, a decrease in first variable will result in a decrease in the second variable.

If the value of r is less than zero, there is a negative or inverse correlation. Thus, a decrease in the first variable will result in an increase in the second variable.

When plotted on a diagram, a positive correlation will see a line which slopes downwards from left to right and a negative correlation will see a line which slopes downwards from right to left.

Let’s look at an example.

Example

A classic case of two variables affecting one another is demand and supply in an economy when the price of the product and the quantity demanded and supplied is known. The values are represented using a simple linear regression.

Pearson R shows that demand and supply have a positive correlation. As more consumers demand products, the amount suppliers are will to produce increases as well. The opposite is true with regard to price.

As the price of a product increases, the demand for that product decreases because consumers are less willing to purchase the product at higher prices. Conversely, suppliers are more willing to produce the product at higher prices creating a positive relationship between price and supply.

Summary Definition

Define Pearson Correlation Coefficient: Pearson R means a statistical relationship between two variables, either positive or negative.