What is a correlation coefficient?

The correlation coefficient is used in economics and throughout econometrics to measure the strength of a relationship between two given variables. This econometric measure also gives an indication of whether the two variables are positively related or negatively related to each other.

The correlation coefficient is measured between -1 to +1. For example if we assessed the relationship between Sales and Advertising and noted that the correlation coefficient between two variables is approaching +1, these variables would be said to have a strong positive relationship. Conversely, any two variables with a correlation coefficient nearer to -1 are said to have a strong negative relationship. A correlation coefficient of zero indicates that there is no relationship between the two variables.

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