Author Question: What is the difference between endogenous and exogenous variables? In the equilibrium condition of ... (Read 106 times)

lak · **on:** Jun 30, 2018

What is the difference between endogenous and exogenous variables? In the equilibrium condition of PPP, which variables are endogenous and which are exogenous?

What will be an ideal response?

Question 2

An improvement in a country's balance of payments means a decrease in its balance of payments deficit, or an increase in its surplus. In fact we know that a surplus in a balance of payments

A) is always beneficial.
B) is usually beneficial.
C) is never harmful.
D) is sometimes harmful.
E) is always harmful.

EAN94 · **Reply #1 on:** Jun 30, 2018

Answer to Question 1

Endogenous variables are considered within a model, while exogenous variables are not directly considered within the model, and are thus taken as given. The difference between these kinds of variables is not related to their nature, but rather on the focus that the researcher has at the time. For example, the weather may be an exogenous variable in a model to determine crop yield, but an endogenous variable in a model that looks at the climate change effects of carbon emissions.

In the theory of PPP all variables are considered to be endogenous, that is, both price levels and the exchange rates are considered to be affected by a multitude of exogenous variables which we are not considering, and yet they are bound by the equilibrium condition that PPP represents.

Answer to Question 2

D