Exogenous variables are variables that affect endogenous variables. Macroeconomic models

In attempts to create an idea of the economic reality, specialists began to use simplified theories. In other words, they are called macroeconomic models. This term should be understood as a form of describing processes and phenomena in order to find a close connection between them.

The importance of models of macroeconomics

They are an abstract reflection of the real economic picture. This is due to the fact that during the study it is impossible to immediately take into account the variety of available parts.

Therefore, no model can be called perfect and complete. It does not provide the only correct answer sent to a certain state in a certain time period.

However, with the help of models, governments of countries have the opportunity:

• Analyze such macroeconomic phenomena and processes as inflation, unemployment, interest rates, exchange rates and much more.
• To make forecasts of macroeconomic processes and phenomena.
• Find solutions for problems.

The application of macroeconomic models allows to optimally combine instruments of monetary, fiscal, foreign exchange and foreign trade policy. This is necessary in order to smooth economic cyclicality and cope with crises.

Varieties of models

Depending on what tasks are being investigated, different types of models are used. The classification is based on several criteria:

• By the method of representation of the process or phenomenon under investigation - graphical and economic-mathematical.
• By duration - short-term and long-term.
• In terms of coverage of the foreign sector - closed and open. Closed models do not take into account the influence of other countries, open take into account the impact of the outside world on the national economy.
• By the number of subjects of the economy - simple (firms and enterprises, households) and complete (state participation).
• By the type of reflection of events in time - static and dynamic. The former do not take into account the time factor that is necessary to accomplish an event. The second characterizes the relationship between the change in the economic performance over time.

The most famous models of macroeconomics

In the course of their historical development there was a huge number. But among them one can name those macroeconomic models that have become very popular.

Model of circular flows.

It states that real and cash flows are realized freely when the total output is equated to the total costs of firms, households, states and the rest of the world.

The model of aggregate demand and aggregate supply. It allows you to:

• Identify the conditions under which equilibrium is achieved in macroeconomics;
• Determine the necessary level of output and price level;
• To reveal the reason for the change in the equilibrium volume of production and the level of prices, and also to show the consequences of these changes;
• To present variants of economic decisions.

The curves of Phillips and Laffer . The Phillips curve points to the relationship between unemployment and inflation.

The Laffer curve is a graphic representation of the Laffer effect. Its essence lies in the fact that a reduction in tax rates will lead to a reduction in government revenues in the short term. In the long run, there is an increase in investment, employment and an increase in the level of savings.

Solow's economic growth model.

Thanks to it, it is possible to determine the optimal rate of saving, at which the maximum possible consumption is ensured.

When constructing macroeconomic models, two types of variables are used.

The concept of exogenous variables

By the time the models are built, they are already known. Exogenous are variables that are set from outside and are considered external. In other words, this is the source information.

As such variables, as a rule, the fiscal policy of the state, the monetary policy of the national bank, as well as their instruments:

• The amount of money supply;
• Norms of reservation;
• Tax rate;
• refinancing rate;
• Public expenditure.

Exogenous variables are variables that influence the outcome of the model solution. And their change is called autonomous.

The concept of endogenous variables

They are the result of the decision, are determined in the course of the calculations performed on the model. Endogenous variables are formed within the macroeconomic model. Therefore they are called internal.

Endogenous variables are dependent on external conditions. Their role in models is played by:

• The level of employment and unemployment;
• Output and economic growth;
• Level of foreign economic activity;
• Price level and inflation.

If we talk about the relationship between internal and external variables, then there are only one-sided causal relationships between them. Exogenous variables are factors that determine endogenous variables, but they themselves do not fall under their influence.

Buns market model

To better understand the concepts of variables, consider an example of building a model of the market of rolls.

Suppose that the economist has three assumptions:

1. The level of demand for biscuits Q ^d depends on the cost of biscuits P _b and total income Y. This relationship is reflected by the equation: Q ^{d =} D (P _{b ,} Y)
2. The number of biscuits Q ^s baked at bakeries depends on the cost of the biscuits P _b and the flour P _f : Q ^s = S (P _{b ,} P _f )
3. The price of buns changes in such a way that demand and supply come to equilibrium: Q ^d = Q ^s

These three equations form a model of the market of rolls, which is represented by a diagram of supply and demand.

The demand curve is directed downward and indicates how many buns consumers are willing to buy at a constant level of income at a certain price. The higher the price, the lower the demand.

The supply curve is directed upwards. It shows how many bakeries at a constant price for flour will produce buns at a certain price. The higher the cost, the higher the supply. The intersection point of curves is the market equilibrium, which determines the equilibrium price of the product and the number of biscuits offered, which corresponds to demand.

In the bread roll model, both kinds of variables are presented. Exogenous variables are the price of flour and total income, endogenous - the price of biscuits and the amount of their sale.

It should be noted that some details have been omitted. The location of bakeries and their ability to set prices different from competitors were not taken into account.

The model shows how exogenous model variables affect endogenous variables. So, with the increase in aggregate income, the demand for a product increases.

And with an increase in the cost of flour, the level of supply of the product decreases.

Thus, with the example of a particular model, it can be clearly seen that a change in the level of income and the cost of flour have a significant impact on the market of biscuits. And this once again confirms the theory that exogenous variables are factors that influence the formation and development of macroeconomic processes and phenomena.