Method of Least Squares

Definition: The Method of Least Squares is another mathematical method that tells the degree of correlation between the variables by using the square root of the product of two regression coefficient that of x on y and y on x.

The numerical notation of the formula to calculate the correlation by the coefficient method of least squares is given below:

method of least squaresLag and Lead in Correlation

While studying the economic and business series, it might be observed that there is a time gap before any cause-and-effect relationship is established and this time gap is called as a “Lag.” For example, production of a commodity may increase today, but might not have an immediate effect on its price, it may take some time for the price to adjust itself to the increased production.

While computing the correlation between the variables by using any of the methods, this time, a gap must be taken into the consideration otherwise wrong or false conclusions would be drawn.

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