Exogenous and endogenous variables

For other uses of exogeny, see Exogeny.

For endogenous variables in biology, see Endogeny (biology).

In an economic model, an exogenous change is one that comes from outside the model and is unexplained by the model. For example, in the simple supply and demand model, a change in consumer tastes is unexplained by the model and imposes an exogenous change in demand that leads to a change in the equilibrium price. Here the exogenous variable is a parameter conveying consumer tastes. Similarly, a change in the consumer's income is given outside the model and affects demand exogenously. Put another way, an exogenous change involves an alteration of a variable that is autonomous, i.e., unaffected by the workings of the model.

In contrast, an endogenous variable is one whose value is determined within the model. For example, in the liquidity preference model, the supply of and demand for money determine the interest rate, so the interest rate is an endogenous variable.

Sub-models and models

An economic variable can be exogenous in some models and endogenous in others. In particular this can happen when one model also serves as a component of a broader model. For example, the IS model of only the goods market derives the market-clearing (and thus endogenous) level of output depending on the exogenously imposed level of interest rates, since interest rates affect the physical investment component of the demand for goods. In contrast, the LM model of only the money market takes income (which identically equals output) as exogenously given and affecting money demand; here equilibrium of money supply and money demand endogenously determines the interest rate. Moreover, the IS model and the LM model can be combined to give the IS-LM model, in which both the interest rate and output are endogenously determined.