# Correlation Coefficient Analysis Case Study

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Updated: Apr 2nd, 2019

## Introduction

Correlation coefficient analysis is used in exploring relationship(s) between variables where there is interest in examining the strength of a relationship between variables. A correlation coefficient is a numeric measure of the amount of strength of the association or relationship between variables.

In this case, the variables are GDP per capita, economic freedom and property rights. The current case study aims to look at the statement, “the nations’ wealth appears to be highly related with a level of economic freedom and property rights” and establish its consistency or otherwise with the collected data.

## Consistency or inconsistency of the statement with the data

The table below shows three countries that had the highest GDP per Capita value, Economic Freedom, and also Property Rights. The table also shows the countries with the lowest GDP per Capita value, Economic Freedom, and also Property Rights.

 Country GDP per Capita (2011) Economic Freedom Index Property Rights Index Austria \$40,624.85 70.3 7.8 Denmark \$47,284.65 76.2 8.2 USA \$42,448.43 76.3 7.5 Nepal \$370.97 50.2 4.4 Madagascar \$270.99 62.4 4.1 Uganda \$440.52 61.9 4.9

Source: Author (2012)

From the above table, it can clearly be seen that there exists a strong relationship between a nations’ wealth (GDP per Capita), Economic Freedom, and Property Rights. From the economic performance of the selected countries, it can be observed that increase in economic freedom results in increased GDP per Capita. Similarly, increase in security of a person’s property results in increased GDP per Capita.

Therefore, there is a positive correlation between the dependent variable (GDP per Capita), and the Independent variables (Economic Freedom and Property Rights). This means that an increase in the independent variable results in an increase in the dependent variable resulting in positive correlation. However, the correlation between GDP per Capita and Property Rights is stronger with a correlation coefficient of 0.8045 compared to the lower correlation coefficient of 0.6860 between GDP per Capita and Economic Freedom.

Countries that have free economic freedom and the most secure freedom rights have large GDP per Capita. This can be Denmark has the highest GDP per Capita (\$47,284.65) and also the most secure property rights (8.2). This country also has a high index economic freedom coming second to USA with an index of 8.2. Increased security in property ownership and rights of use means that people are more confident of the future and can invest without fear of loosing their property and hence investment.

This will therefore spur growth and results in the growth of a nation’s wealth (GDP per Capita). At the same time, secure property rights regimes means that more new investors whether domestic or foreign will be willing to invest in the country. This will result in growth in the GDP. When people feel insecure about their property, they do not invest and in extreme cases may even to get out of earlier investments resulting in a decline in GDP per capita.

This was the case in Uganda when the dictatorial government of Id Amin seized foreign owned property (of mostly immigrant Indians) consequently plunging Uganda in an economic crisis that has yet to recover fully. Economic freedom does not only make trade easier, but also allows healthy competition. This completion is good because it ensures that high quality products that are affordable to the customers are in the market.

This will therefore result in increased GDP per Capita. Economic freedom is also associated with reduction of the process of licensing of new enterprises. This removal of unnecessary barriers to trade encourages new people to venture into business resulting in increased GDP per Capita.

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IvyPanda. (2019) 'Correlation Coefficient Analysis'. 2 April.