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.