Endogenous variable

economic-dictionary

An endogenous variable is one whose value is determined by the relationships established within the model in which it is included.

Something endogenous is something that is formed inside something. Therefore, from there we deduce that an endogenous variable is one that is formed inside a model. The most basic economic model to explain this concept is that of supply and demand. Suppose we want to estimate the quantity of cereals supplied. To do this, we will take two variables:

O = P + L

Where:

O: It's the offer

Q: Is the price

L: It's the rains

From a theoretical point of view, changes in price can affect quantity supplied and, at the same time, quantity supplied can affect price. Thus, the price variable is an endogenous variable.

The same does not happen with the rains, why? Because rain is an external variable. In other words, the rain can affect the supply, but the quantity supplied cannot affect the amount of rainfall. The rains are what they are. This would be a case of an exogenous variable.

From the above, we can say that we have two types of variables. Exogenous variables whose value does not depend on the evolution of the model. And the endogenous variables, whose value does depend on the evolution of the model.

Examples of endogenous variable

Endogenous variables are a fundamental part of econometrics and economic models. There are many variables whose value depends on the evolution of a model. That is, they are not pre-established. In economics, causal models are used on many occasions. Or what is the same, models that try to explain one variable in terms of others.

The study of endogenous variables plays a fundamental role in the economic sphere. Below are several examples of endogenous variables:

  • Income and consumption: We can estimate that the higher the income, the more we will consume. As with higher consumption, we can predict higher income.
  • Education and income level: The higher the education, the more likely it is to obtain a higher income. But also, the higher the income level, the more likely we are to have higher education levels.
  • Price and demand: The lower the price, the higher the demand. But the higher the demand, the higher the price.

These types of variables also play an important role in areas other than the economy.

Macroeconomic variable

Tags:  derivatives Colombia economic-analysis 

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