Variable

Background

In economics, the concept of a variable is fundamental as it encompasses quantities that are liable to change. These changes are essential for understanding the dynamic nature of economic models and the behaviors within economic systems.

Historical Context

The use of variables in economic modeling traces back to classical economists like Adam Smith and was further refined through successive schools of thought. With the advent of econometrics in the 20th century, the role of variables—specifically distinguishing between exogenous and endogenous variables—has become increasingly sophisticated.

Definitions and Concepts

A variable in economics is a quantity that is subject to change. Economic variables can measure a diverse array of aspects, including prices, interest rates, income levels, and the quantities of goods.

1. Exogenous Variable: A variable where changes arise from causes outside the scope of a given model. These variables are considered to affect the model without being influenced by the model’s system.

2. Endogenous Variable: A variable determined within the model itself. These variables are dependent on other variables within the same model and provide insight into the functional relationships depicted by the model.

See also random variable, which is used within probability and statistics to describe outcomes subject to random variation.

Major Analytical Frameworks

Classical Economics

Classical economics primarily relied on fixed variables, assuming certain elements of the economic system to be stable. Variables like labor or capital were assumed to set initial conditions.

Neoclassical Economics

The Neoclassical framework introduced more detailed analysis through the use of supply and demand variables, incorporating both exogenous inputs (like technology changes) and endogenous outcomes (like price determination).

Keynesian Economics

Keynes introduced the concept of macroeconomic variables, such as aggregate demand and national income, stressing the distinction between endogenous variables like investment and exogenous variables like government policy.

Marxian Economics

Marxian theory analyzes variables associated with labor value, surplus value, and capital accumulation, emphasizing their roles within the capitalist mode of production.

Institutional Economics

Institutional economics acknowledges the role of social, cultural, and legal factors as variables critical to understanding economic behavior and performance.

Behavioral Economics

In Behavioral Economics, psychological factors are integrated as variables, often treated exogenously, affecting decision-making processes and market outcomes.

Post-Keynesian Economics

Post-Keynesians further developed sectoral balance models where sector-specific variables interact both endogenously and exogenously within an economic system.

Austrian Economics

Austrian economists focus on subjective preferences as variables that impact market signals like prices and interest rates, often focusing on exogenous variables influenced by policy changes.

Development Economics

Variables in development economics include factors such as economic growth rates, income distribution, and poverty levels, encompassing a mix of endogenous and exogenous influences.

Monetarism

Monetarists like Milton Friedman emphasize monetary variables, considering money supply as primarily exogenous, impacting endogenous variables like inflation and economic output.

Comparative Analysis

Comparing these frameworks, classical theories often regard variables as fixed inputs and predefined outputs, whereas modern approaches incorporate more dynamic, interrelated variables. The distinction between exogenous and endogenous variables provides a foundational analytic tool across all economic schools.

Case Studies

1. The Role of Technological Change (Exogenous) in the Solow Growth Model.
2. Impact of Government Policies on National Income (Exogenous/Endogenous relationships) in Keynesian Economics.
3. Behavioral Variable Influence on Market Outcomes in Experimental Economic Settings.

Suggested Books for Further Studies

• “Microeconomic Theory” by Andreu Mas-Colell, Michael Whinston, and Jerry Green.
• “Macroeconomics” by N. Gregory Mankiw.
• “Foundations of Behavioral Economics” by Sanjit Dhami.
• “Development as Freedom” by Amartya Sen.
• “Monetary Theory and Policy” by Carl E. Walsh.

Related Terms with Definitions

• Parameter: A fixed element in a statistical model that defines relationships between variables.
• Coefficient: A numerical value representing the relationship strength between variables.
• Dependent Variable: An outcome influenced by other variables within an economic model.
• Independent Variable: A predictor that influences outcomes without being affected by them within a model.
• Stochastic Variable: A random variable that incorporates randomness into model predictions.