Chiang Ch5b

Ch.
5b Linear Models & Matrix

Algebra
5.5 Cramer's Rule
5.6 Application to Market and National-Income Models
5.7 Leontief Input-Output Models
5.8 Limitations of Static Analysis
1
5.2 Evaluating a third-order determinant
Evaluating a 3rd order determinant by Laplace expansion
 a11 a12 a13 
Given A  a21 a22 a23  find A
 a31 a32 a33 
Expanding down column 1
a22 a23 a12 a13 a12 a13
A  a11  a21  a31
a32 a33 a32 a33 a 22 a23
A  a11 C11  a21 C 21  a31 C31
3
A 
i 1
ai1 Ci1 where Cij   1i  j M ij
Ch. 5a Linear Models and Matrix Algebra

5.1 - 5.4 2
5.5 Deriving Cramer’s Rule (nxn)
1
x*  adjoint A d 
A
 x *1   C11 C21  Cn1   d1 
 *   d 
x2   C12 C22  Cn 2   2 
   1
 
  A      
   1x1   
 x*  C1n C2 n  Cnn   
 n 
  d n 
nxn nx1
nx1
Applying the associative law of multiplication,

1
find x*  adjoint A * d 
A
Ch. 5b Linear Models and Matrix Algebra

5.5 - 5.8 3
5.5 Deriving Cramer’s Rule (3x3)
 3 
 i 1

 d i Ci1 

 x1*   d1 C11  d 2 C 21  d 3 C31 
 * 1  1  3 
1)  x2 
 x* 
 d1 C12  d 2 C 22
A
 d 3 C32  
A  i 1 
d i Ci 2 

 d1 C13  d 2 C 23  d 3 C33   3 
 3 
 d C 

 i 1

i i3 

3
2) 
i 1
d i Ci1  d1 C11  d 2 C 21  d i C31 where Cij   1i  j M ij
3
a 22 a 23 a12 a13 a12 a13
3) 
i 1
d i Ci1  d1
a32 a33
 d2
a32 a33
 d3
a 22 a23
 A1
 d1 a12 a13 
4) A1  d 2 a22 a 23 . Find A1 such that x1*  A1 A
 d 3 a32 a33 

5.5 - 5.8 4
d1 a12 a13
3 d 2 a22 a23
*
 d i Ci1
d 3 a32 a33 A1
x1  3i 1
 
a11 a12 a13 A
i 1
ai1 Ci1
a21 a22 a23
a31 a32 a33

5.5 - 5.8 5
a11 d1 a13
3 a21 d 2 a23
d i Ci 2
a31 d 3 a33 A2
x2*  i 1
3
 
a11 a12 a13 A
a
i 1
i2 Ci 2
a21 a22 a23
a31 a32 a33

5.5 - 5.8 6
a11 a12 d1
3 a21 a22 d 2
d C i i3
a31 a32 d 3 A3
x3*  i 1
3
 
a11 a12 a13 A
a
i 1
i3 Ci 3
a21 a22 a23
a31 a32 a33

5.5 - 5.8 7
n
*
d i Ci1
A1
x 
1
i 1
n

A
 ai1 Ci1
i 1
n
*
d i Ci 2
A2
x 
2
i 1
n

A
 ai 2 Ci 2
i 1
n
*
d i Cin
An
x 
n
i 1
n

A
 ain Cin
i 1

5.5 - 5.8 8
n
Looking for Given that A   aij Cij  scalar
i 1
a pattern : where (j  j) for a column expansion

n
1 n n d i Ci1
x1* 
A
d i Ci1 A   ai1 Ci1 for the 1st col. exp. x1*  i 1
n
i 1 i 1
a
i 1
i1 Ci1
n
1 n n d i Ci 2
x2* 
A
d i Ci 2 A   ai 2 Ci 2 for the 2 nd col. exp. x2*  i 1
n
i 1 i 1
a
i 1
i2 Ci 2
n
1 n n d i Cin
xn* 
A
d i Cin A   ain Cin for the n th col. exp. xn*  i 1
n
i 1 i 1
a
i 1
in Cin
5.5 - 5.8 9
 n 

 d i Ci1 
 i 1 
x *
 n   A1 A 
 *

 d i Ci 2  
1

x 2   i 1   A2 A 
 x*   1  n    A3 A 
 3 A  d C  
   i i3 
  

 *  i 1   A A
x
 n   n    n 
 

 i 1
d C
i in 

5.5 - 5.8 10
5.6 Applications to Market and National-income
Models: Matrix Inversions
Matrix Inversion Cramer's Rule

Ax  d
Ax  d
 4 1 2 x   4
4 1 2 x  4
A  5 2 1 ; x   y ; d  4
A  5 2 1  ; x   y ; d  4
1 0 3  z  3
1 0 3  z  3
x  A1d
A1  3; A2  2; A3  5;
 6 - 3 - 3
1
A -1  - 14 10 6  A  6;
6
 - 2 1 3  x  A1 A  1 2
x   6 - 3 - 3 4 y  A2 A 1 3
 y   1 - 14 10 6  4
  6 z  A3 A 5 6
 z   - 21 3  3
x  1 2; y  1 3; z  5 6

5.5 - 5.8 11
5.6 Macro model
Section 3.5, Exercise 3.5-2 (a-d), p. 47 and
Section 5.6, Exercise 5.6-2 (a-b), p. 111
Given the following model
(a) Identify the endogenous variables
(b) Give the economic meaning of the parameter g
(c) Find the equilibrium national income (substitution)
(d) What restriction on the parameters is needed for a
solution to exist?
Find Y, C, G by (a) matrix inversion (b) Cramer’s rule

5.5 - 5.8 12
5.6 The macro model (3.5-2, p. 47)
The model
Y  C  I0  G
C  a  b * (Y  T0 ) (a  0, 0  b  1)
G  g *Y (0  g  1)
Standard form
1Y  1C  1G  I 0
 bY  1C  0G  a  bT0
 gY  0C  1G  0

5.5 - 5.8 13
5.6 The macro model (3.5-2, p. 47)
Matrix form
 1 1 1Y   I0 
  b 1 0 C  a  bT 
    0
 g 0 1 G  0 
The determinant
1 1 1
A  b 1 0  1  b  g 
g 0 1
5.5 - 5.8 14
5.6 Application to Market & National Income
Models: Cramer’s rule (3.5-2, p. 47)
Finding the solution of x*j by replacing the jth column of the determinant
with the column vector of constants
I0 1 1
* AY I0  a  bT0
AY  a  bT0 1 0  I0  a  bT0 Y  
A 1 (b  g )
0 0 1
1 I0 1
AC bI0  1 g a  bT0 
AC   b a  bT0 0  bI0  1 g a  bT0  C*  
A 1 (b  g)
g 0 1
1 1 I0
ga  bT0  I0 
AG
AG   b 1 a  bT0  ga  bT0  I0  G *

A 1  (b  g)
g 0 0

5.5 - 5.8 15
Models: Matrix Inversion (3.5-2, p. 47)
 1 1 1 1 1 1

A   b 1 0   A  b 1 0  1  b  g 
 g 0 1  g 0 1
1 b g 1 1 1 
C  1 1 g g  CT  b 1 g b 
1 b 1b g g 1 b

5.5 - 5.8 16
Models: Matrix Inversion (3.5-2, p. 47)
Y *  1 1 1  I0 
 * 1   a  bT 
C 
  1 b  g  b 1  g b  0
G*   g g 1  b  0 
 
* I 0  a  bT0
Y 
1  b  g 
* bI 0  1  g a  bT0 
C 
1  b  g 
* g I 0  a  bT0 
G 
1  b  g 
5.5 - 5.8 17
Miller and Blair 2-3, Table 2-3,
p 15 Economic Flows ($ millions)
Inputs (col’s) Sector 1 Sector 2 Final demand Total gross

(zi1) (zi2) (di) output
Outputs (rows) (xi)
Intermediate 150 500 350 1000
inputs: Sector 1
Intermediate 200 100 1700 2000
inputs: Sector 2
Primary inputs 650 1400 1100 3150
(wi)
Total outlays 1000 2000 3150 6150
(xi)

5.5 - 5.8 18
Miller and Blair 2-3, Table 2-3,
p 15 Inter-industry flows as factor shares
Inputs (col’s) Sector 1 Sector 2 Final demand Total output

(zi1/x1 (zi2/x2 (di)
Outputs (rows) (xi)
=ai1) =ai2)
Intermediate 0.15 0.25 350 1000
inputs: Sector 1
Intermediate 0.20 0.05 1700 2000
inputs: Sector 2
Primary inputs 0.65 0.70 1100 3150
(wi/xi)
Total outlays 1.00 1.00 3150 6150
(xi/xi)

5.5 - 5.8 19
Structure of an input-output model
The model
x1  a11 x1  a12 x2    a1n xn  d1
x2  a21 x1  a22 x2    a2 n x n  d 2
    
xn  an1 x1  an 2 x2    ann xn  d n
x i  a i1 x1  a i2 x2 d
sector 1 1000  0.15 *1000  0.25 * 2000  350
sector 2 2000  0.20 *1000  0.05 * 2000  1700

5.5 - 5.8 20
The standard form
x1  a11 x1  a12 x2    a1n xn  d1
x2  a21 x1  a22 x2    a2 n x n  d 2
    
xn  an1 x1  an 2 x2    ann xn  d n
xi a i1 x1  a i2 x2  d
sector 1 1000  0.15 *1000  0.25 * 2000  350
sector 2 2000  0.20 *1000  0.05 * 2000  1700

5.5 - 5.8 21
Matrix form
1 a11  a12   a1n  x1   d1 
  a 1 a   a  x  d 
 21 22 2n   2 
  2
          
    
  an1  an2  1  ann  xn  dn 
sector 1 1  0.15  0.25  1000   350 

sector 2   0.20 1  0.05 2000  1700
    

5.5 - 5.8 22
The matrix form decomposed
1 0  0 a11 a12  a1n   x1   d1 
0
 1  0 a21 a22  a2n   x2  d2 
 
              
      
0 0  1 an1 an2  ann  xn  dn 
I  A xd
 1 0 0.15 0.25  1000   350 
       
 0 1   0.20 0 .05  2000  1700

5.5 - 5.8 23
Miller & Blair, p. 102
AA-1  I A1 A 1  A 0 A0  I
Taylor series approximation (Chiang & Wainwrigh t, p. 250, 9.5 - 2(a))

1  x 
1
 
n 0
x n  1  x  x 2  ...  x n 1 if x  1 scalar algebra

I  A1   A n  I  A  A 2  ...  An 1 by analogy
n 0
2
1 0  0.15 0.25  0.15 0.25  1.2541 0.3300
       ...   
0 1 0.20 0.05 0.20 0.05 0.2640 1.1221 

5.5 - 5.8 24
Matrix form simplified
I  A xd
 1 0 0.15 0.25  1000   350 
       
 0 1   0 .20 0 . 05 2000  1700 
1  0.15  0.25  1000   350 
  0.20 1  0.05 2000  1700
     
 0.85  0.25 1000   350 
 0.20 0.95  2000  1700
     
5.5 - 5.8 25
Inverting the matrix
x*  I  A1 d
1
1000   0.85  0.25  350 
2000   0.20 0.95  1700
     
I  A  (0.85 * .095)  (0.20 * 0.25)  0.7575
1000  1 0.95 0.25  350 
2000  0.7575 0.20 0.85 1700
    
1000  1.2541 0.3300  350 
2000  0.2640 1.1221 1700
    
5.5 - 5.8 26
Checking the results with matrix inversion
 x *  1.2541 0.3300  350 
 *1     1700
x
 2   0 .2640 1 .1221 
x1*  1.2541* 350  0.3300 *1700  1000
x2*  0.2640 * 350  1.1221*1700  2000
x1*  350  89  561  1000 base output
x2*  92  1700  208  2000

5.5 - 5.8 27
Checking the results with Cramer's rule
1
 x1*   0.85  0.25  350 
 *      ; I  A  0.7575
 x2   0.20 0.95  1700
350  0.25
* I  A1 1700 0.95 757.5
x1     1000
IA 0.7575 0.7575
0.85 350
* I  A2
 0.20 1700 1515
x 
2    2000
IA 0.7575 0.7575
5.5 - 5.8 28
If we double consumption from sector 1,
how much primary input do we need in total?
 x*1  1.2541 0.3300  700 
 *    1700
x
 2   0. 2640 1. 1221  
x1*  1.2541* 700  0.3300 *1700  1439
x*2  0.2640 * 700  1.1221*1700  2092
a01 x1*  a02 x2*  w0*
0.65 *1439  0.70 * 2092  $2,400

5.5 - 5.8 29
If we double consumption from sector 1,
how much primary input do we need in total?
 x *  1.2541 0.3300  700 
 *1     1700
x
 2   0. 2640 1. 1221  
x *1  1.2541* 700  0.3300 *1700  1439
x *2  0.2640 * 700  1.1221*1700  2092
x *1  700  178  561  1439
x *2  184  1700  208  2092

5.5 - 5.8 30
If we increase consumption from sector 1 by $1,
how much do we increase production in the economy?
 x1*  1.2541 0.3300 1
 *    0 
x
 2   0. 2640 1 .1221 
x*1  1.2541*1  0.3300 * 0  $1.2541 in sector 1
x*2  0.2640 *1  1.1221* 0  $0.264 in sector 2
$1.2541  $0.264  $1.52
$1.52
 1.52  sector 1' s output multiplier
$1.00
5.5 - 5.8 31
5.8 Limitations of Static Analysis
Static analysis solves for the endogenous
variables for one equilibrium
Comparative statics show the shifts
between equilibriums
Dynamics analysis looks at the
attainability and stability of the
equilibrium

5.5 - 5.8 32
5.6 Application to Market and National-Income Models
Market model
National-income model
Matrix algebra vs. elimination of variables
Why use matrix method at all?

Compact notation
Test existence of a unique solution
Handy solution expressions subject to
manipulation

5.5 - 5.8 33

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5b Linear Models & Matrix

Ch. 5a Linear Models and Matrix Algebra

Applying the associative law of multiplication,

Ch. 5b Linear Models and Matrix Algebra

Ch. 5b Linear Models and Matrix Algebra

Ch. 5b Linear Models and Matrix Algebra

Ch. 5b Linear Models and Matrix Algebra

Ch. 5b Linear Models and Matrix Algebra

Ch. 5b Linear Models and Matrix Algebra

a pattern : where (j  j) for a column expansion

Matrix Inversion Cramer's Rule

Ch. 5b Linear Models and Matrix Algebra

Ch. 5b Linear Models and Matrix Algebra

Ch. 5b Linear Models and Matrix Algebra

Ch. 5b Linear Models and Matrix Algebra

Ch. 5b Linear Models and Matrix Algebra

Inputs (col’s) Sector 1 Sector 2 Final demand Total gross

Ch. 5b Linear Models and Matrix Algebra

Inputs (col’s) Sector 1 Sector 2 Final demand Total output

Ch. 5b Linear Models and Matrix Algebra

Ch. 5b Linear Models and Matrix Algebra

Ch. 5b Linear Models and Matrix Algebra

sector 1 1  0.15  0.25  1000   350 

Ch. 5b Linear Models and Matrix Algebra

Ch. 5b Linear Models and Matrix Algebra

Ch. 5b Linear Models and Matrix Algebra

Ch. 5b Linear Models and Matrix Algebra

Ch. 5b Linear Models and Matrix Algebra

Ch. 5b Linear Models and Matrix Algebra

Ch. 5b Linear Models and Matrix Algebra

Why use matrix method at all?

Ch. 5b Linear Models and Matrix Algebra

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