What is an 'Endogenous Variable'

An endogenous variable is a classification of a variable generated by a statistical model that is explained by the relationships between functions within the model. For example, the equilibrium price of a good in a supply and demand model is endogenous because it is set by a producer in response to consumer demand. It is the opposite of an exogenous variable.

BREAKING DOWN 'Endogenous Variable'

Endogenous variables are important in econometrics and economic modeling because they show whether a variable causes a particular effect. Economists employ causal modeling to explain outcomes, or dependent variables, based on a variety of factors, or independent variables, and to determine to which extent a result can be attributed to an endogenous or exogenous cause.

Endogenous variables have values that shift as part of a functional relationship between other variables within the model. This relationship is also referred to as dependent and is seen as predictable in nature. Generally, the variables correlate in such a way where the general movement of one can be expected to produce a particular result in the other, though not necessarily in the same direction, as a rise in one variable may cause a fall in another. As long as the change is correlating, it is considered endogenous.

Outside of economics, other fields also use models with endogenous variables. These can include the field of meteorology and certain aspects of agriculture. In certain cases, the relationship is only endogenous in one direction. For example, while pleasant weather may lead to higher amounts of tourism, higher amounts of tourism do not affect the weather.

Examples of Endogenous Variables

If a model is examining the relationship between employee commute times and fuel consumption, as the commute time rises within the model, the fuel consumption also generally increases. This is due to the fact the longer a person’s commute tends to be, the more fuel it takes to reach his destination, such as a 30-mile commute requiring more than a 20-mile commute. Other relationships that may be endogenous in nature include personal income to personal consumption, rainfall and plant growth, or education obtained and future income levels.

Endogenous vs. Exogenous Variables

In contrast to endogenous variables, exogenous variables are considered independent. This means one variable within the formula does not dictate, or directly correlate, to a change in the other. Exogenous variables have no direct or formulaic relationship, such as personal income and color preference, rainfall and gas prices, or education obtained and favorite flower.

RELATED TERMS
  1. Endogenous Growth

    The notion that policies, internal processes and investment capital, ...
  2. Positive Correlation

    A relationship between two variables in which both variables ...
  3. Endogenous Growth Theory

    An economic theory which argues that economic growth is generated ...
  4. Correlation Coefficient

    A measure that determines the degree to which two variable's ...
  5. Random Variable

    A variable whose value is unknown or a function that assigns ...
  6. Variable Cost Ratio

    Variable costs expressed as a percentage of sales. The variable ...
Related Articles
  1. Insights

    Understanding Regression

    Regression is a statistical analysis that attempts to predict the effect of one or more variables on another variable.
  2. Investing

    What's a Sensitivity Analysis?

    Sensitivity analysis is used in financial modeling to determine how one variable (the target variable) may be affected by changes in another variable (the input variable).
  3. Investing

    Stock and Flow Variables Explained: A Closer Look at Apple

    The difference between stock and flow variables is an essential concept in finance and economics. We illustrate with financial statements from Apple Inc.
  4. Financial Advisor

    Variable Annuity Basics

    Find out how variable annuities can help you plan for retirement by offering the returns of the stock market with the guarantee of insurance.
  5. Investing

    Explaining Linear Relationships

    A linear relationship describes the proportionality between an independent variable and a dependent variable.
  6. Financial Advisor

    Variable Annuities: The Pros and Cons

    Variable annuities are one of the most complicated financial instruments. Here is an in depth look at their pros and cons.
  7. Investing

    Regression Basics For Business Analysis

    This tool is easy to use and can provide valuable information on financial analysis and forecasting. Find out how.
  8. Investing

    What's the Correlation Coefficient?

    The correlation coefficient is a measure of how closely two variables move in relation to one another. If one variable goes up by a certain amount, the correlation coefficient indicates which ...
  9. Financial Advisor

    Variable Annuities: The Good, The Bad and the Ugly

    An in-depth guide to everything you need to know and watch out for with variable annuities.
  10. Retirement

    Variable Annuities: The Do-It-Yourself Pension Plan

    Variable annuities can cost more than mutual funds, but that might be worth the protection they can add to your retirement.
RELATED FAQS
  1. What variables are most important when making a prediction through sensitivity analysis?

    Explore sensitivity analysis and how this method considers different variables to determine a course of action based on statistical ... Read Answer >>
  2. What does it mean if the correlation coefficient is positive, negative, or zero?

    Learn what the correlation coefficient between two variables is and what positive, negative and zero correlation coefficients ... Read Answer >>
  3. How should I interpret a negative correlation?

    Learn more about correlation and how businesses analyze variables. Find out how negative correlations are interpreted by ... Read Answer >>
  4. What is the difference between direct costs and variable costs?

    Learn about variable costs and direct costs, how direct costs and variable costs are classified and the differences between ... Read Answer >>
  5. What are some examples of positive correlation in economics?

    Learn the most common examples of positive correlation in microeconomics and microeconomics, including demand and price, ... Read Answer >>
Hot Definitions
  1. IRS Publication 970

    A document published by the Internal Revenue Service (IRS) that provides information on tax benefits available to students ...
  2. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  3. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  4. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  5. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  6. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
Trading Center