In an

economic An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with t ...

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 statistical methods to economic data in order to give empirical content to economic relationships.M. Hashem Pesaran (1987). "Econometrics," '' The New Palgrave: A Dictionary of Economics'', v. 2, p. 8 p. 8� ...

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 statisti ...

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 In statistics, linear regression is a linear approach for modelling the relati ...

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 ar ...

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, t ...

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 ...

depending on the exogenously imposed level of

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; 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.

References

Economics models Technical terminology {{Economic-term-stub

Examples

Sub-models and models

See also

References