What is an endogenous variable? Where is this data type used? Are exogenous and endogenous variables the same, or are they completely different concepts? All this will be discussed in the article.
general information
In econometrics, a system of simultaneous, joint equations contains endogenous and exogenous variables. How do they differ? An endogenous variable is a dependent value, the number of which is equal to the number of equations in the system. To denote them, use y.
Exogenous variables are predefined values that affect endogenous, but are not dependent on them. They are displayed using x.
What is the principle of classification? It all depends on the chosen theoretical concept for the model in question. So, in one case, the variables can be exogenous, in the second - endogenous. Although there are certain elements for which a certain role is assigned. Thus, non-economic variables such as social status, climatic conditions, age category and gender are considered exclusively as exogenous.
Impact on calculations
The structure of the model form allows you to see how an arbitrary exogenous variable can affect the value of the endogenous. It is advisable in this case to choose variables that can act as an object of regulation. Through change and control, the characteristics of endogenous values can be determined in advance. In order to accurately determine the identification conditions, it is possible to impose restrictions on each coefficient of all parameter matrices of the used structural model. Moreover, it is necessary that for the missing variables it would be possible, using the values in them, to obtain a data set whose determinant is not equal to zero. Moreover, this matrix should have a rank no less than there are endogenous variables.
What is obtained is called a system of simultaneous equations in the literature. Why? The fact is that dependent variables can simultaneously be in several equations. And what comes of this? It turns out that it makes no sense to implement the traditional partition into independent variables.
Concretize
So, an endogenous variable is a variable indicator of an object, which is used to characterize its internal properties and qualities. Used to solve problems that are associated with economic and mathematical modeling. It is often determined that an endogenous variable is the output. Their change can occur within simulated systems. It should be noted once again that the separation of variables into two different types is a rather arbitrary matter, and depends on the nature of the tasks. You also need to remember that variables are interconnected. For this, both direct and feedback are used. As an example, we can consider the most important variables that are taken into account during the economic and mathematical modeling of social processes in different regions of the Russian Federation.
Use in theory
Endogenous and exogenous variables are very widely used in predicting. The models that are built on them can be used for a significant range of problems. Take, for example, GDP growth, or rather, the Solow model, which explains it. She uses exogenous parameters for this, such as the rate of technological progress. However, its reason is not taken into account. Therefore, it was not clear how to actually stimulate economic growth?
But from the 80s of the last century, new theories began to appear that suggested betting on endogenous variables. Models arranged in this way tried to explain the emerging technological changes as a result of existing market interactions, rather than external influences. Over the past decades, a number of qualitatively distinguishable theoretical models have been published, where attempts have been made to justify the nature of the changes inherent in the system itself, which induce growth. Particular attention is paid to human capital, which characterizes the amount of practical experience and scientific knowledge that accumulate in the learning process and production activities.
Theoretical features
It should be noted that there are model variables that are not subject to external influences. Therefore, to conduct a simulation experiment, they must be set in advance. It is also desirable to ensure the selection of the type of function, which will allow using the linear model as the most reliable and simple. In this case, the specification problem is updated. This is especially true for the expression of the discovered relationships, as well as the ratio of the composition of variables in mathematical form. After all, it is necessary to form the initial prerequisites and limitations. The success of the simulation depends on how well the specification is implemented. An example is the fact that they served as the starting point for a number of important studies in the field of pricing, subject to the observance of economic equilibrium.
The differences and features of the theory
It is necessary to pay close attention to the problem of the possibility of obtaining the same certain model parameters, which are set by a system of simultaneous equations. More precisely, the parameters of the structural form, which reveal the mechanism for creating endogenous variables. The system itself may contain regressive (behavioral) equations and identities, which are the relationship between different values. One should not forget progous endogenous variables, which can lead to various delays and deviations in the practical implementation of the obtained calculations. There is also another important point. From a mathematical point of view, exogenous variables do not correlate with regression errors. With endogenous, the situation is the opposite. In addition, we can recall the dynamic models, which describe the functioning of the studied systems. In the case of them, all variables, both endogenous and exogenous, are distinguished from the very beginning.
Conclusion
Here, in general, is the entire brief theoretical excerpt about endogenous variables in macroeconomic models. But, alas, their practical application in reality is not as easy and not forced. To solve various economic problems and successfully apply theory in practice, it is necessary to devote a lot of time to all potential situations, starting with the easiest. In addition, there are a large number of interesting aspects for which you need to have an idea of what you have to work with. One could also talk about the Pareto equilibrium, demand curves at various price values and much more. But that's another story.