Exogenous and endogenous variables

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In an economic model, an exogenous variable is one whose measure is determined outside the model and
is imposed on the model, and an exogenous change is a change in an exogenous
variable.[1]: p . 8 [2]: p . 202 [3]: p . 8 

In contrast, an endogenous variable is a variable whose measure is determined by the model. An

endogenous change is a change in an endogenous variable in response to an exogenous change that is
imposed upon the model.[1]: p . 8 [3]: p . 8 

The term endogeneity in econometrics has a related but distinct meaning. An endogenous random variable
is correlated with the error term in the econometric model, while an exogenous variable is not.[4]

Examples
In the LM model of interest rate determination,[1]: p p. 261–7  the supply of and demand for money determine
the interest rate contingent on the level of the money supply, so the money supply is an exogenous variable
and 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[1]: p p. 250–260  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. But when the
IS model and the LM model are combined to give the IS-LM model,[1]: p p. 268–9  both the interest rate and
output are endogenously determined.

See also
Cambridge capital controversy

References
1. Mankiw, N. Gregory. Macroeconomics, third edition, 1997.
2. Varian, Hal R., Microeconomic Analysis, third edition, 1992.
3. Chiang, Alpha C. Fundamental Methods of Mathematical Economics, third edition, 1984.
4. Wooldridge, Jeffrey M. (2009). Introductory Econometrics: A Modern Approach (https://books.
google.com/books?id=64vt5TDBNLwC&pg=PA88) (Fourth ed.). Mason: South-Western.
 p. 88. ISBN 978-0-324-66054-8.

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