FUNCTIONAL RELATIONSHIP

(Statistics) A hypothetical relationship that describes the effect of one or more Independent Variables on a Dependent Variable, of the general form: Y = f(X1, X2, ... , Xn); where Y represents the dependent variable whose behavior is a function of, f( ), the values of the independent variables, X1, X2, ..., Xn. A fundamental assumption of a functional relationship is that changes in the independent variables, also referred to as the Exogenous Variables, prescribe or determine changes in the dependent, or Endogenous Variable, consequently leading to a flow of causation from the independent variables to the dependent variable. As such, a functional relationship is not exactly comparable to a mathematical equation in which variables may be moved from one side of the equation to the other without changing the validity of the equality. In a functional relationship by contrast, once the flow of causation has been prescribed (the Specification), the equation's (model's) structure is fixed.