Endogenous and Exogenous Variables

In static or dynamic economic theory, the criteria employed in determining whether or not a system of equations is complete are derived from the purpose for which such systems are constructed: the explanation of economic phenomena. In each case a distinction is drawn between the endogenous variables that the economist sets out to explain and the exogenous variables that he takes as given. The number of equations required for the explanation of the values or, in the dynamic case, of the movements of the endogenous variables, then equals the number of such variables.

Exogenous Variables in Economic Theory

In determining which variables are set aside as exogenous, two main principles are implicitly or explicitly applied in economic literature. They might be described as the departmental principle and the causal principle. The departmental principle treats as exogenous those variables which are wholly or partly outside the scope of economics, like weather and climate, earthquakes, population, technological change, political events. The causal principle, which does not always lead to the same result, regards as exogenous those variables which influence the remaining (endogenous) variables but are not influenced thereby.

The causal principle is often used also if it applies only approximately, that is, if the influence of the endogenous variables on those treated as exogenous is presumed to be small.