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.

Endogenous variable 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 that 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 use models with endogenous variables. These fields include 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

For example, assume 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 that 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 gas than a 20-mile commute. Other relationships that may be endogenous in nature include personal income to personal consumption, rainfall and plant growth, education obtained and future income levels, etc.

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, for example, personal income and color preference, rainfall and gas prices, education obtained and favorite flower, etc.

RELATED TERMS
  1. Endogenous Growth

    Endogenous growth theory, which has redefined the concept of ...
  2. Exogenous Growth

    Exogenous growth theory states that economic growth arises due ...
  3. Variable Cost Ratio

    The variable cost ratio compares costs, which fluctuate depending ...
  4. Multiple Linear Regression - MLR

    Multiple linear regression (MLR) is a statistical technique that ...
  5. Variable Rate Mortgage

    A variable rate mortgage is a type of home loan in which the ...
  6. Coefficient of Determination

    The coefficient of determination is a measure used in statistical ...
Related Articles
  1. Financial Advisor

    Life Insurance: Variable Vs. Variable Universal

    Do you know why you might need one policy versus the other? Read on to find out the difference between Variable and Variable Universal life insurance.
  2. Retirement

    How a Variable Annuity Works After Retirement

    These investments can provide extra income after you retire. Here’s a guide to when and how you will receive the payout.
  3. Retirement

    Update Your Variable Annuity With Section 1035

    Thanks to a special tax code clause, you can surrender a variable annuity without paying income tax.
  4. Retirement

    Variable Annuities: A Good Retirement Investment?

    Variable annuities provide lifetime payments and tax-deferred growth, but – given their hefty fees – are they right for you?
  5. Retirement

    Should Your 401(k) Be in an Annuity?

    Housing your retirement plan inside a variable annuity contract offers some big advantages, but only if you are close to retirement.
  6. Personal Finance

    The Complete Guide to Planning a Yearly Budget

    A personal budget is a useful tool for tracking your income and expenses.
  7. Investing

    Business forecasting: Understanding the basics

    Discover the methods behind financial forecasts and the risks inherent when we seek to predict the future.
  8. Investing

    Bet Smarter With the Monte Carlo Simulation

    This technique can reduce uncertainty in estimating future outcomes.
RELATED FAQS
  1. How do fixed costs and variable costs affect gross profit?

    Learn about the differences between fixed and variable costs and find out how they affect the calculation of gross profit ... Read Answer >>
  2. Can a variable annuity be rolled into an IRA?

    Learn how to roll over your variable annuity to an IRA when you retire or change jobs, and how to do it without triggering ... Read Answer >>
  3. How can I create a linear regression in Excel?

    Learn the steps involved in creating a linear regression chart in Microsoft Excel. A linear regression is a data plot that ... Read Answer >>
  4. What is the difference between linear regression and multiple regression?

    Learn the difference between linear regression and multiple regression and how multiple regression encompasses not only linear ... Read Answer >>
Trading Center