Linear Models and Matrix Algebra

Chiang_Ch4.ppt 1
 Ch 4 Linear Models and Matrix Algebra

4.1 Matrices and Vectors

4.2 Matrix Operations
4.3 Notes on Vector Operations
4.4 Commutative, Associative, and Distributive
Laws
4.5 Identity Matrices and Null Matrices
 4.6 Transposes and Inverses
4.7 Finite Markov Chains

Chiang_Ch4.ppt 2
 Objectives of math for economists

 To understand mathematical economics problems by stating the

unknown, the data and the conditions
 To plan solutions to these problems by finding a connection
between the data and the unknown
 To carry out your plans for solving mathematical economics
problems
 To examine the solutions to mathematical economics problems
for general insights into current and future problems
(Polya, G. How to Solve It, 2nd ed, 1975)

Chiang_Ch4.ppt 3
3.4 Solution of a General-equation System

Given (p. 44) Why?

2x + y = 12 4x + 2y =24
4x + 2y = 24 2(2x + y) = 2(12)
one equation with two
Find x*, y* unknowns
y = 12 – 2x 2x + y = 12
4x + 2(12 – 2x) = 24 x, y
4x +24 – 4x = 24 Conclusion:
0 = 0 ? indeterminant! not all simultaneous
equation models have
solutions
Chiang_Ch4.ppt 4
 4.1 Matrices and Vectors
Matrices as Arrays
Vectors as Special Matrices
Assume an economic model as system of linear equations
in which
aij parameters, where
i = 1.. n rows, j = 1.. m columns, and n=m
xi endogenous variables,
di exogenous variables and constants
a11 x1  a12 x 2   a1 m x n  d 1
a 21 x1  a 22 x 2   a2m xn  d 2
   
a n1 x1  an 2 x2   a nm x n  d n

Chiang_Ch4.ppt 5
 4.1 Matrices and Vectors
 A is a matrix or a rectangular array of elements in which the elements
are parameters of the model in this case.
 A general form matrix of a system of linear equations
Ax = d where
A = matrix of parameters (upper case letters => matrices)
x = column vector of endogenous variables, (lower case => vectors)
d = column vector of exogenous variables and constants
Solve for x*
 a11 a12  a1m   x1   d 1 
a a 22  a 2 m   x 2   d 2 
 21 
         
    
 a n1 an 2  a nm   x n   d n 
Ax  d
x *  A 1 d
Chiang_Ch4.ppt 6
 One Commodity Market Model
(2x2 matrix)
Economic Model ac
*
32)
(p.
P 
bd
1) Qd=Qs
* ad  bc
2) Qd = a – bP (a,b >0) Q 
3) Qs = -c + dP (c,d >0)
bd
 Find P* and Q* Matrix Algebra
Scalar Algebra
1 b  Q   a 
Endog. :: Constants 1  d   P    c 
4) 1Q + bP = a     
5) 1Q – dP = -c Ax  d
x*  A1d
Chiang_Ch4.ppt 7
One Commodity Market Model
(2x2 matrix)
Matrix algebra

1 b  Q   a 
1  d   P    c 
    
Ax  d
1
Q  1 b   a 
*

 *     
 P  1  d   c 
* 1
x A d
Chiang_Ch4.ppt 8
General form of 3x3 linear matrix

Scalar algebra form

parameters & endogenous variables exog. vars
& const.
a11x + a12y + a13z = d1
a21x + a22y + a23z = d2
a31xalgebra+form
Matrix a32y + a33z = d3
parameters endog. exog. vars.
vars & constants

 a 11 a 12 a 13   x   d1 
a a 22    
a 23   y    d 2  
 21
 a 31 a 32 a 33   z   d 3 
Chiang_Ch4.ppt 9
 1. Three Equation National Income Model
(3x3 matrix)
Let
Y = C + I0 + G0
C = a + b(Y-T) (a > 0, 0<b<1)
T = d + tY (d > 0, 0<t<1)
Endogenous variables?
Exogenous variables?
Constants?
Parameters?
Why restrictions on the parameters?

Chiang_Ch4.ppt 10
 2. Three Equation National Income Model

Endogenous: Y, C, T: Income (GNP), Consumption, and Taxes

Exogenous: I0 and G0: autonomous Investment & Government
spending
Constants a & d: autonomous consumption and taxes
Parameter t is the marginal propensity to tax gross income 0 < t < 1
Parameter b is the marginal propensity to consume private goods
and services from gross income 0 < b < 1

*a  bd  I 0  G0
8) Y 
1  b  bt

Chiang_Ch4.ppt 11
4. Three Equation National Income Model

 Economic Model Parameters & Exog.

Endogenous vars. vars.
Y = C + I0 + G0
Y C T &cons.
C = a + b(Y-T) 1Y -1C +0T = I0+G0
T = d + tY -bY +1C +bT = a
 Find Y*, C*, T* -tY +0C +1T = d

Chiang_Ch4.ppt 13
5. Three Equation National Income Model

Parameters & Exog.

Endogenous vars. vars.
Y C T &cons.

1Y -1C +0T = I0+G0

-bY +1C +bT = a
-tY +0C +1T = d

 1  1 0 Y   I 0  G0 
 b 1 b C    a 
    
  t 0 1 T   d 
Chiang_Ch4.ppt 14
6. Three Equation National Income Model
Parameters & Exog.
Endogenous vars. vars.
 Given
Y C T &cons.

Y = C + I0 + G0 1Y -1C +0T = I0+G0

-bY +1C +bT = a
C = a + b(Y-T) -tY +0C +1T = d
T = d + tY
 1  1 0 Y   I 0  G0 
 Find Y*, C*, T*  b 1 b C    a 
Ax  d     
  t 0 1 T   d 
x*  A1d
Chiang_Ch4.ppt 15
7. Three Equation National Income Model

 1  1 0 Y   I 0  G0 
 b 1 b  C    a 
    
  t 0 1 T   d 
Ax  d
1
Y   1  1 0  I 0  G0 
*

 *    
C    b 1 b   a 
T *    t 0 1  d 
 
* 1
x A d
Chiang_Ch4.ppt 16
1. Two Commodity Market Equilibrium

Economic Model
1) Qdi = Qsi, i=1, 2
2) Qd1 = 10 - 2P1 + P2
3) Qs1 = -2 +3P1
4) Qd2 = 15 + P1 - P2
5) Qs2 = -1 + 2P2

Find Q1*, Q2*, P1*, P2*

Chiang_Ch4.ppt 17
2. Two Commodity Market Equilibrium

Scalar algebra form

(endog on left & exog/const on right)
1Q1 +0Q2 +2P1 - 1P2 = 10
1Q1 +0Q2 - 3P1 +0P2= -2
0Q1 +1Q2 - 1P1 +1P2= 15
0Q1 +1Q2 +0P1 - 2P2= -1

Chiang_Ch4.ppt 18
 3. Two Commodity Market Equilibrium

 Section 3.4, p. 42 Scalaralgebra

 Given
1Q1 +0Q2 +2P1 - 1P2 = 10
Qdi = Qsi, i=1, 2
1Q1 +0Q2 - 3P1 +0P2= -2
Qd1 = 10 - 2P1 + P2
0Q1+ 1Q2 - 1P1 + 1P2= 15
Qs1 = -2 + 3P1
Qd2 = 15 + P1 - P2 0Q1+ 1Q2 +0P1 - 2P2= -1
1 0 2  1   Q1   10 
Qs2 = -1 + 2P2 1
 0  3 0  Q2   2
 Find Q1*, Q2*, P1*, P2* 
Ax  d 0 1  1 1   P1   15 
    
x*  A1d 0 1 0  2  P2    1 

Chiang_Ch4.ppt 19
4. Two Commodity Market Equilibrium

1 0 2  1  Q1   10 
1 0  Q  
 3 0   2   2 
 
0 1  1 1   P1   15 
    
0 1 0  2  P2    1 
Ax  d
1
Q1*  1 0 2  1  10 
 * 
Q 2   1 0  3 0    2
 
 P *  0 1 1 1   15 
 1*     
 P2  0 1 0  2   1
x*  A1d
Chiang_Ch4.ppt 20
Ch. 4 Linear Models & Matrix Algebra

Matrix
used:
algebra can be Ax  d
a. to express the system * 1
of equations in a
x A d
compact notation;
1 adjA
b. to find out whether A 
solution to a system of
equations exist; and
det A
c. to obtain the solution if it * adjA
exists. Need to invert the x  d
A matrix to find the A
solution for x*

Chiang_Ch4.ppt 21
4.2 Matrix Operations
Addition and Subtraction of Matrices
Scalar Multiplication
Multiplication of Matrices
The Question of Division
Digression on Σ Notation

2 1 3 1  5 2 
Matrix addition  7 9    0 2    7 11 
     
A2 x 2  B 2 x 2 C 2 x 2

2 1 1 0 1 1
Matrix subtraction 7 9  2 3  5 6
     

Chiang_Ch4.ppt 22
4.3 Geometric interpretation

x2

5
v = [2 3]
u = [3 2] 4

v+u = [5 5] 3

1
x1

1 2 3 4 5

Chiang_Ch4.ppt 23
4.4 Laws of Matrix Addition & Multiplication
Matrix Addition
Matrix Multiplication

Commutative law: A + B = B + A

a11 a12  b11 b12   a11  b11 b12  a12 

A B       
a a b b a 
 21 22   21 22   21 21 22a b  a 22 

b11 b12  a11 a12  b11  a11 b12  a12 

B A      
b b b b b  a b
 21 22   21 22   21 21 22 22   a

Chiang_Ch4.ppt 24
4.2 Scalar multiplication

 2 4  16 32 
8   
 6 1   48 8 
1  2 4  1 4 1 2 
   
8 6 1   3 4 1 8 

 a11 a12    a11  a12 

 1  
a 21 a 22   a 21  a 22 

Chiang_Ch4.ppt 25
4.3 Geometric interpretation (2)

x2

Scalar 6

multiplication 5

Source of linear 4
6 4  2U
3
dependence
2
3 2  U
1
x1

-4 -3 -2 -1 1 2 3 4 5 6


 1 U   3  2  -2

Chiang_Ch4.ppt 26
4.3 Linear dependence

 A setof vectors is linearly v 1  2 7

dependent if any one of
them can be expressed as a v 2  1 8
linear combination of the v 3  4 5
remaining vectors;
otherwise it is linearly 3v1  2v 2
independent.  6 21  2 16
 Dependence prevents
solving the system of  4 5  v3
equations. More unknowns
than independent 3v1  2v2  v3  0
equations.

Chiang_Ch4.ppt 27
4.1Vector multiplication
(inner or dot product)

y  c1 z1  c 2 z 2  c3 z 3  c 4 z 4
4
y   ci z i  z1 
i 1
z 
y  c 1 c2 c3 c4  2

 z3 
 
y = c.z z4 

1x1 = (1x4)( 4x1)

Chiang_Ch4.ppt 28
4.3 Notes on Vector Operations
Multiplication of Vectors
Geometric Interpretation of Vector Operations
Linear Dependence
Vector Space

An [m x 1] column vector u and

 3 a [1 x n] row vector v, yield a
u  
2 x1
 2 product matrix uv of
v  1 4  5 dimension [m x n].
1x 3
3  3 12 15 
uv    1 4 5  
2 x3
2  2 8 10 

Chiang_Ch4.ppt 29
4.2 Matrix multiplication
 Multiplication of matrices require conformability
condition
 The conformability condition for multiplication is that
the column dimensions of the lead matrix A must be
equal to the row dimension of the lag matrix B.
 What are the dimensions of the vector, matrix, and
result?
 b11 b12 b13 
aB  a 11 a 12   c
 b 21 b 23 
c11 c12 c13
22 

 a11b11  a12b21 a11b12  a12b22 a11b13  a12b23

• Dimensions: a(1x2), B(2x3), c(1x3)

Chiang_Ch4.ppt 30
 4.2 Σ notation
 Greek letter sigma (for sum) is another convenient way of
handling several terms or variables
 i is the index of the summation
 What is the notation for the dot product?

3
a1b1 +a2b2 +a3b3 = a b
i 1
i i

c
11 c12 c13   a11b11  a12 b21 a11b12  a12 b22 a11b13  a12 b23 
2 2
2

a 1k bk1 a 1k bk 2 a
k 1
1k bk 3
k 1 k 1

Chiang_Ch4.ppt 31
 4.4 Matrix Multiplication

 Matrix multiplication is generally not commutative. That

is, AB  BA even if BA is conformable
(because diff. dot product of rows or col. of A&B)

1 2 0  1
A  ,B  
3 4 6 7 

10  26 1 1  27  12 13

AB     
30   46  3 1  47   24 25
01   13 02   14  3  4
BA   
 61  73 62  7 4   27 40 


Chiang_Ch4.ppt 32
 4.4 Matrix multiplication

Exceptions
AB=BA iff
B = a scalar,
B = identity matrix I, or
B = the inverse of A, i.e., A-1

Chiang_Ch4.ppt 33
4.5 Identity and Null Matrices
Identity Matrices
Null Matrices
Idiosyncrasies of Matrix Algebra

1 0 
 Identity Matrix is a square  0 1  or
matrix and also it is a  
diagonal matrix with 1
along the diagonals 1 0 0 
similar to scalar “1” . 0 1 0  etc .
 Null matrix is one in
 0 0 1 
which all elements are
zero 0 0 0 
similar to scalar “0” 0 0 0 
Both are “idempotent”  
matrices 0 0 0
A = AT and
A = A2 = A3 = …
Chiang_Ch4.ppt 34
 4.6 Transposes & Inverses
Properties of Transposes
Inverses and Their Properties
Inverse Matrix and Solution of Linear-equation Systems

Transposed matrices 3 8  9
A
(A')'=A 1 0 4 
Matrix rotated along its
principle major axis 3 1 
(running nw to se)  
Conformability 
A  8 0
 
changes unless it is  9 4
square

Chiang_Ch4.ppt 35
4.6 Inverse matrix

AA-1 =I • Ax =d
A-1A=I • A-1A x = A-1 d
Necessary for • Ix = A-1 d
matrix to be • x = A-1 d
square to have
inverse • Solution depends on
If an inverse exists A-1
it is unique • Linear independence
D=(A-1)' • Determinant test!

Chiang_Ch4.ppt 36
 4.2 Matrix inversion

Itis not possible to • In matrix algebra

divide one matrix by AB-1  B-1 A. Thus
writing does not
another. That is, we clearly identify
can not write A/B. whether it
This is because for represents
two matrices A and AB-1 or B-1A
B, the quotient can • Matrix division is
be written as AB-1 or matrix inversion
B-1A. • (topic of ch. 5)

Chiang_Ch4.ppt 37