What Are Positive Correlations in Economics?

A positive correlation exists when two variables move in the same direction. A positive correlation can exist because one variable influences the other. In other cases, the two variables are independent and are influenced by a third variable. In a perfectly positive correlation, the variables move together by the same percentage and direction all the time. 

Positive Correlations in Microeconomics

Microeconomics analyzes the behavior of individual consumers and private firms. One of the most common relationships is seen between demand and price and how the law of supply and demand influences price. When demand increases without an increase in supply, a corresponding price increase occurs. Similarly, when the demand for a good or service decreases, its price drops.

The relationship between demand and price represents causation and a positive correlation. An increase in demand causes the corresponding price increase; the price of a good or service increases precisely because more consumers want it and are willing to pay more for it. As demand decreases, fewer people want a product, and sellers lower its price to entice purchases.

In contrast, supply is negatively correlated with price. When supply decreases without a corresponding demand decrease, prices increase. Consumers compete for a reduced number of goods, which makes each item more valuable.

Positive Correlations in Macroeconomics

A positive correlation is evident in macroeconomics, the study of economies as a whole. Consumer spending and GDP are two metrics that maintain a positive relationship. When spending increases, GDP rises as firms produce more goods and services to meet consumer demand. Conversely, firms slow production amid a slowdown in consumer spending to bring production costs in line with revenues and limit excess supply.

Like demand and price, consumer spending and GDP are positively correlated variables where movement by one variable causes movement by the other. In this case, consumer spending is the variable that affects a change in GDP. Firms set production levels based on demand, and demand is measured by consumer spending. As the level of consumer spending moves up and down, production levels strive to match the change in demand, resulting in a positive relationship between the two variables.

The Bottom Line

A positive correlation occurs as two variables move in the same direction. In economics, examples of variables with a positive correlation include the relationship between demand and price and GDP with consumer spending.