Exogenous and endogenous variables: Difference between revisions

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{{For|other uses of exogeny|Exogeny}}

{{For|endogenous variables in biology|Endogeny (biology)}}

In an [[economics|economic]] [[model (economics)|model]], an '''exogenous variable''' change is one that comesis fromdetermined outside the model and is unexplainedimposed byon the model. For example, in the simple [[supply and demand]] model, a change in consumer tastes is unexplained by the model and imposes an exogenous change in demand that leads to a change in the [[economic equilibrium|equilibrium]] price. Here the '''exogenous variablechange''' is a [[parameter]]change conveyingin consumeran tastesexogenous variable.<ref Similarlyname=Mankiw>Mankiw, aN. changeGregory. in the consumer's'Macroeconomics'', incomethird isedition, given1997.</ref>{{rp|p. outside8}}<ref thename=Varian>Varian, model and affects demandHal exogenouslyR., Put''Microeconomic another wayAnalysis'', anthird exogenous change involves an alteration of a variable that is autonomousedition, i1992.e</ref>{{rp|p., unaffected202}} by the workings of the [[model (economics)|model]].

In contrast, an '''endogenous variable''' is onea variable whose value is determined withinby the model. ForAn example,'''endogenous inchange''' theis [[liquiditya preference]]change model,in thean supplyendogenous ofvariable andin demandresponse forto [[money]]an determineexogenous thechange [[interestthat rate]],is soimposed upon the interestmodel.<ref ratename=Mankiw/>{{rp|p. is8}}<ref anname=Mankiw/>{{rp|p. endogenous variable.8}}

==Examples==

In the simple [[supply and demand]] model, a change in consumer tastes is unexplained by the model and imposes an exogenous change in demand that leads to a change in the endogenous [[economic equilibrium|equilibrium]] price and the endogenous equilibrium quantity transacted. Here the exogenous variable is a [[parameter]] conveying consumer tastes. Similarly, a change in the consumer's income is exogenously given, outside the model, and appears in the model as an exogenous change in demand.<ref name=Mankiw/>{{rp|p. 10}}

In the [[IS–LM model|LM model]] of interest rate determination, 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 derives the 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. Moreover,But when the IS model and the LM model can beare combined to give the [[IS-LM model]], in which both the interest rate and output are endogenously determined.

[[:Category:Technical terminology]]