In an
economic
An economy is an area of the Production (economics), production, Distribution (economics), distribution and trade, as well as Consumption (economics), consumption of Goods (economics), goods and Service (economics), services. In general, it is ...
model, an exogenous variable is one whose measure is determined outside the model and is imposed on the model, and an exogenous change is a change in an exogenous variable.
[Mankiw, N. Gregory. ''Macroeconomics'', third edition, 1997.][Varian, Hal R., ''Microeconomic Analysis'', third edition, 1992.][Chiang, Alpha C. ''Fundamental Methods of Mathematical Economics'', third edition, 1984.]
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.
[
The term endogeneity in ]econometrics
Econometrics is the application of Statistics, statistical methods to economic data in order to give Empirical evidence, empirical content to economic relationships.M. Hashem Pesaran (1987). "Econometrics," ''The New Palgrave: A Dictionary of ...
has a related but distinct meaning. An endogenous random variable is correlated
In statistics, correlation or dependence is any statistical relationship, whether causal or not, between two random variables or bivariate data. Although in the broadest sense, "correlation" may indicate any type of association, in statistics ...
with the error term In mathematics and statistics, an error term is an additive type of error. Common examples include:
* errors and residuals in statistics, e.g. in linear regression
* the error term in numerical integration
In analysis, numerical integration ...
in the econometric model, while an exogenous variable is not.
Examples
In the LM model of interest rate determination,[ the supply of and demand for ]money
Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...
determine the interest rate
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...
contingent on the level of the money supply, so the money supply
In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include Circulation (curren ...
is an exogenous variable and the interest rate is an endogenous variable.
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 model of only the goods market[ derives the ]market-clearing
In economics, market clearing is the process by which, in an economic market, the supply of whatever is traded is equated to the demand so that there is no excess supply or demand. The new classical economics assumes that in any given market, assum ...
(and thus endogenous) level of output
Output may refer to:
* The information produced by a computer, see Input/output
* An output state of a system, see state (computer science)
* Output (economics), the amount of goods and services produced
** Gross output in economics, the value of ...
depending on the exogenously imposed level of interest rate
An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...
s, since interest rates affect the physical investment In macroeconomics, investment "consists of the additions to the nation's capital stock of buildings, equipment, software, and inventories during a year" or, alternatively, investment spending — "spending on productive physical capital such as mach ...
component of the demand for goods. In contrast, the LM model of only the money market takes income (which identically equals output) as exogenously given and affecting money demand
In monetary economics, the demand for money is the desired holding of financial assets in the form of money: that is, cash or bank deposits rather than investments. It can refer to the demand for money narrowly defined as M1 (directly spendable ...
; 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,[ both the interest rate and output are endogenously determined.
]
See also
* Cambridge capital controversy
The Cambridge capital controversy, sometimes called "the capital controversy"Brems (1975) pp. 369-384 or "the two Cambridges debate", was a dispute between proponents of two differing theoretical and mathematical positions in economics that starte ...
References
Economics models
Technical terminology
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