Endogenous variable


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What part is giving you trouble? Do you know what it means for two variables to be correlated? Do you know what "the error term" is?
I know what is correlation of two variables and error term (=observed-predicted value).

It confuses me the part how a variable is/can be correlated with error term and what does it mean? Does it mean that a variable contributes more to the error value?


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It can be an issue in Time Series Analysis, say with autoregressive correlation. Search out some picture of what it can look like, that may help.