Business, Legal & Accounting Glossary
Endogenous is a term mainly used in the application of economic theories. Any variable is termed as endogenous if it originates due to factors within organization. In other words, endogenous variables have explicit causes within model. In order to understand the concept of endogenous variables, a small example can be referred to. Supposing a model of supply and demand of any agricultural product, factors like changes in the weather or consumer preferences are determined by external factors and so they are termed as exogenous variables. Variables like the price of product and quantity of product sold are determined within this model; hence they are determined by internal factors and are termed as endogenous variables.
The degree to which endogenous variables can be effect by internal variables can be referred to as endogeneity. In a simple supply and demand model for any commodity, the prices are termed as endogenous variable as demand for any commodity changes due to change in price. Thus, here it can be said that the variable price has total endogeneity if the demand and supply curves are known.
Endogeneity can be a problem in the analysis of economic and econometric models. In econometrics, the problem of endogeneity can occur mainly in any regression model where an autonomous variable is correlated with the error term. This problem can be overcome by several methods like instrumental variable regression and Heckman selection correction.
Endogeneity is a regular phenomenon in any model of time series. Endogeneity is applicable when there is a time series analysis of any fundamental processes. It is a common phenomenon for a number of factors within any simple model to be dependent or get affected by values of other factors. The dependent factor may be in n time period and depends on other factors of n-1 period. Suppose we take an example of pest invasion on agricultural products. Let pest invasion be independent of all factors with a given time period. Pest invasion of one time period can be dependent on the level of rainfall and fertilizer used for the next period. Thus it can be concluded that pest invasion is exogenous in one time period and endogenous in another time period.
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This glossary post was last updated: 29th March, 2020 | 5 Views.