Thursday, October 22, 2009

Endogenous Drivel

(and other big words)

Looking thru N. Gregory Mankiw's Macroeconomics (fourth edition, 2000). He writes:

"Models have two kinds of variables: endogenous variables and exogenous variables."
Ooh, I need this. I don't know these big words. I'm interested in the economics, but the big words are a problem for someone of little memory. (The big words are so troubling that I don't even notice Mankiw uses the word variables three times in that sentence.)

"Endogenous variables are those variables that a model tries to explain. Exogenous variables are those variables that a model takes as given. The purpose of a model is to show how the exogenous variables affect the endogenous variables."
Okay this is good. I'm looking at it like computer programming. Send some values to a function, and get a return value. The values I send are exogenous. The return value (calculated by the function, based on the values I send) is endogenous. I get it.

Mankiw continues:

"In other words, as Figure 1-4 illustrates, exogenous variables come from outside the model and serve as the model's input, whereas endogenous variables are determined inside the model and are the model's output."
Just like a function in C. Arguments come from outside the function and serve as the function's input, while return values are determined inside the function and are the function's output. Okay.... (Arguments, or parameters maybe. I'm not always clear on the big words.)

Anyway I wanna see his Figure 1-4...

This cracks me up! I'm thinkin' economics is just like computer programming, except computer books don't show pictures like this. Mankiw's first three figures were good: graphs showing long-term trends in output, inflation, and unemployment. Real data. And then, this? Who needs a diagram in order to understand something comes in, something goes out -- ??

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