Exogenous and endogenous variables: Difference between revisions

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{{For2|the term in biology|[[Endogeny (biology)]]|the term in econometrics|[[Endogeneity (econometrics)]]|other uses|[[Exogeny]]}}

{{short description|Classification of variables in economic models}}

{{For2for multi|the term in biology|[[Endogeny (biology)]]|the term in econometrics|[[Endogeneity (econometrics)]]|other uses|[[Exogeny]]}}

In an [[economics|economic]] [[model (economics)|model]], an '''exogenous variable''' is one whose valuemeasure is determined outside the model and is imposed on the model, and an '''exogenous change''' is a change in an exogenous variable.<ref name=Mankiw>Mankiw, N. Gregory. ''Macroeconomics'', third edition, 1997.</ref>{{rp|p. 8}}<ref name=Varian>Varian, Hal R., ''Microeconomic Analysis'', third edition, 1992.</ref>{{rp|p. 202}}<ref name=Chiang>Chiang, Alpha C. ''Fundamental Methods of Mathematical Economics'', third edition, 1984.</ref>{{rp|p. 8}} In contrast, an '''endogenous variable''' is a variable whose measure is determined by the model. An endogenous change is a change in an endogenous variable in response to an exogenous change that is imposed upon the model.<ref name="Mankiw" />{{rp|p. 8}}<ref name="Chiang" />{{rp|p. 8}}

The term '''[[endogeneity (econometrics)|endogeneity]]''' in [[econometrics]] has a related but distinct meaning. An endogenous random variable is [[correlation|correlated]] with the [[Errors and residuals|error term]] in the econometric model, while an exogenous variable is not.<ref>{{cite book |first=Jeffrey M. |last=Wooldridge |authorlink=Jeffrey Wooldridge |title=Introductory Econometrics: A Modern Approach |___location=Mason |publisher=South-Western |edition=Fourth |year=2009 |isbn=978-0-324-66054-8 |page=88 |url=https://books.google.com/books?id=64vt5TDBNLwC&pg=PA88 }}</ref>

In contrast, an '''endogenous variable''' is a variable whose value is determined by the model. An '''endogenous change''' is a change in an endogenous variable in response to an exogenous change that is imposed upon the model.<ref name=Mankiw/>{{rp|p. 8}}<ref name=Chiang/>{{rp|p. 8}}

The term '''[[endogeneity (econometrics)|endogeneity]]''' in [[econometrics]] has a related but distinct meaning. An endogenous random variable is [[correlation|correlated]] with the [[Errors and residuals|error term]] in the econometric model, while an exogenous variable is not.<ref>{{cite book |first=Jeffrey M. |last=Wooldridge |authorlink=Jeffrey Wooldridge |title=Introductory Econometrics: A Modern Approach |___location=Mason |publisher=South-Western |edition=Fourth |year=2009 |isbn=978-0-324-66054-8 |page=88 |url=https://books.google.com/books?id=64vt5TDBNLwC&pg=PA88 }}</ref>

==Examples==

In the [[IS–LM model|LM model]] of interest rate determination,<ref name=Mankiw/>{{rp|pp. 261–7}} the supply of and demand for [[money]] determine the [[interest rate]] contingent on the level of the money supply, so the [[money supply]] is an exogenous variable and the interest rate is an endogenous variable.

In a model of [[firm behavior]] with competitive input markets, the prices of [[input (economics)|inputs]] are exogenously given, and the amounts of the inputs to use are endogenous.<ref name=Varian/>{{rp|p. 202}}

==Sub-models and models==

An economic variable can be exogenous in some models and endogenous in others. In particular this can happen when one model also serves as a component of a broader model. For example, the [[IS-LM|IS]] model of only the goods market<ref name=Mankiw/>{{rp|pp. 250–260}} derives the [[Market clearing|market-clearing]] (and thus endogenous) level of [[output (economics)|output]] depending on the exogenously imposed level of [[interest rate]]s, since interest rates affect the [[physical investment]] component of the demand for goods. In contrast, the [[IS-LM|LM]] model of only the money market takes income (which [[identity (mathematics)|identically]] equals output) as exogenously given and affecting [[money demand]]; here equilibrium of money supply and money demand endogenously determines the interest rate. But when the IS model and the LM model are combined to give the [[IS-LM model]],<ref name=Mankiw/>{{rp|pp. 268–9}} both the interest rate and output are endogenously determined.

== See also ==

* [[Cambridge capital controversy]]

== References ==

{{reflist}}

[[Category:Economic terminology stubs]]

[[Category:Economics models]]

[[Category:Technical terminology]]

{{Economic-term-stub}}