Download Dependent Variables) are “determined” within (endo) a system

EC132 Macroeconomic Principles
Woods College of Advancing Studies, Boston College
0.06 Basic Variables and Basic Graphics for Macroeconomic Principles
Professor Ware
Endogenous and Exogenous Variables: For our purposes, Endogenous Variables (or
Dependent Variables) are “determined” within (endo) a system (genous) of relationships
organized by a macroeconomic theory. This system is typically specified in terms of a set of
equations defining equilibrium conditions in a macroeconomic market. The main endogenous
variables in macroeconomic theory (EC132 Handout 2.00) are (a) Real National Income, Y, (b)
an Aggregate Price (Index) of Goods, P, both of which are determined in (a theory of) a
Macroeconomic Goods Market, (c) a Nominal Unit Price of Financial Assets, PB, which is
determined in (a theory of) a Macroeconomic Financial Assets Market, and (d) the Real
i , which is determined in (a theory of) a Macroeconomic Money Market.
Interest Rate, O
Endogenous variables, in turn, depend on Exogenonous Variables (Independent Variables)
and Behavioral Parameters (marginal propensities, regression coefficients, historical
constants, etc.) “determined” outside (exo) a given system (a given macroeconomic market).
Macroeconomic Constants: Most all exogenous variables and behavioral parameters
are treated as though they are constant in value for an entire accounting period (a calendar
year or a fiscal year). Specifically, these variables do not change in value when the value of
Real National Income, the Aggregate Price Index, the Nominal Unit Price of Financial
Assets, or the Real Interest Rate changes during an accounting period. Take, for example,
Government Spending, G, which is treated as an exogenous variable in the Macroeconomic
Goods Market (where endogenous variable real national income, Y, is determined). The
value of G is known when G0 in (1) is known (is specified in an application of theory):
(1) G = G0
where G0 > 0 (constant)
If G0 has a value of 100, then this Macroeconomic Constant is plotted as a perfectly
straight, horizontal line (at 100 units north of origin 0) vs real national income, Y (east/west):
G=G 0 = 100
│
Macroeconomic Constant
\
│
---------- │ ----------- │ ---------- │ --------- │ ----------------------0
1000
2000
3000
4000 Real National Income,Y
Behavioral Relations: Other macroeconomic variables (e.g., Planned Consumption
Spending, C, and Liquidity Demand, L3) vary in some consistent (behavioral) fashion with
the value of Real National Income, Y, or with the value of the Real Interest Rate, Oi . For
example, planned consumption spending (EC132 Handout 4.01) will depend on real national
income (some form of the relationship C = C(Y)). (Note that planned consumption spending
is an endogenous variable in the macroeconomic goods market where endogenous variable Y
is determined. Whew!) Suppose C and Y have a linear (straight line) relationship such as …
(2) C = C(Y) = c 0 + c 1 * Y, where c 0 > 0 (constant) and 0 < c 1 < 1 (constant)
Then the value of planned consumption spending in (2) depends on the sum of two
components: (a) Exogenous Consumption Demand, c0, the Intercept (the value of C(Y) in
(2) when Y = 0) in the linear relation, plus (b) Endogenous Consumption Demand, the
product c1*Y, which has a Slope of c1 = ∆C(Y)/∆Y (the rate at which C(Y) rises or falls per
unit increase or decrease in Y), which is greater than zero but less than one (0 < c 1 < 1). Now,
suppose that C = 10 + 0.8*Y. This is plotted below as a straight line, C(Y) (north/south) vs Y
(east/west) with an Intercept of c 0 = 10 and a Slope of c1 = 0.8: (The scale is a bit off!)
\
C = C(Y)
│
│
│
Intercept │
c 0 = 10
│
\
↑∆C(Y)
→ → ∆Y → → →
C(Y)
Linear Relation
for C = C(Y)
Slope ∆C(Y)/∆Y = c1 = 0.8 ( 0 < c1 < 1 )
---------- │ ----------- │ ---------- │ --------- │ ----------------------0
1000
2000
3000
4000 Real National Income,Y
Ø Page 11 Ø Draft: 5-Sep-04 ) Printed: 15-Sep-04)
EC132 Handout 1a 0.06