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Question

When is rank correlation more precise than simple correlation coefficient?


Solution

Rank correlation is more precise than simple correlation coefficient in the following situations:

(i) When there is a reason to suspect the variables e.g., in a remote village where measuring rods or weighing scales are not available, height and weight of people cannot be measured precisely but the people can be easily ranked in terms of height and weight.

(ii) When data is qualitative, it is difficult to quantify qualities such as fairness, honesty etc. Ranking may be a better alternative to quantifications of qualities.

(iii) When data has extreme values - Sometimes the correlation coefficient between two variables with extreme values may be quite different from the coefficient without the extreme values. Under these circumstances, rank correlation provides a better alternative to simple correlation.


Economics

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