Understanding Exogenous Variables in Economics

In economics, an exogenous variable is a variable that is not determined within the model or system being studied. Instead, it is assumed to be determined outside of the model, often by external factors such as government policies, technological changes, or other external events.

In other words, exogenous variables are factors that are not endogenous, meaning they are not determined within the model itself. They are instead imposed upon the model from outside, and their effects on the system being studied are assumed to be external and uncontrollable.

For example, in a model of the economy, the level of government spending might be an exogenous variable, as it is determined by political decisions rather than by the economic forces being modeled. Similarly, technological changes or natural disasters might also be considered exogenous variables, as they are not determined by the economic forces being studied but can have a significant impact on the economy.

Exogenous variables are often represented in economic models using external shocks or policy changes, and their effects on the system being studied are typically modeled using econometric techniques such as regression analysis.