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Linear Equations D.1. Ex: D.2. D.3.

A linear equation is one involving only the first power of the unknown variables. A linear equation in n variables, a1x1 + a2x2 + + anxn = b, is a hyperplane in Rn. A system of equations with at least one solution is called compatible. If it has no solution it is If a compatible system of equations has only one solution it is said to be determinate; otherwise it is compatible and determinate compatible and indeterminate incompatible

incompatible. indeterminate. Ex: i) 2x + 3y = 8, 3x + 2y = 16 ii) 2x + 3y = 8, 4x + 6y = 16 iii) 2x + 3y = 8, 4x + 6y = 15 the system is non-homogeneous. R.1. The homogeneous system Ax = 0 will have a non-trivial solution IFF r (A) < n a11 a12 a1n a21 a22 a2n A= : : : am1 am2 amn x1 x2 x= : xn mxn 0 b1 0 b2 0= : b= : 0 bm nx1 mx1 mx1

D.4. The system of simultaneous linear equations: Ax = b is said to be homogeneous if b = 0. Otherwise

Case i) n > m, r (A) min {m, n} m < n , hence always a non-trivial solution (x 0) exists. ii) n = m iii) n < m R.2. The system Ax = b is compatible iff r(A) = r( A, b ). R.3. A compatible system is determinate iff r(A) = r( A, b ) = n where n is the number of variables. Vector inequalities For x,y Rn , we will have i) x y if xi yi for all i ii) x > y if xi yi for all i and xi > yi for at least one i. iii) x >> y if xi > yi for all i. If x 0 ; x is called non-negative, if x > 0 ; x is called semi-positive, if x >> 0; x is called positive, where 0 is null vector.
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a non-trivial solution exists iff r(A) < n.

D.5. A matrix A is said to be: a) non-negative iff every element aij 0; b) semi-positive iff every row and every column of A is semi-positive vector (i.e. every aij 0 and at least one element of each row and each column is strictly positive); c) positive iff every element aij > 0. D.6. A square matrix A is said to be decomposable (reducible) if we can permute its rows and columns together in such a way to give the matrix of the following form: k A11 n-k A12 A22 k n-k

where A11 and A22 are square submatrices, is a rectangular submatrix with all elements being zero and A12 is a rectangular submatrix. Otherwise the matrix is indecomposable (irreducible). If in addition A can be written in the form A11 : A22 : : Ann

where Aii are square and indecomposable matrices then the matrix is completely decomposable. D.7. Given an nxn matrix A = { aij } the successive principal minors are defined as the following determinants a11 a21 : ak1 a12 a1k a22 a2k : : ak2 akk

Dk =

, k = 1,2 3, n.

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The static Leontief open model

A model of industrial interdependence with three aspects

1. Simplest form of Walrasian general equilibrium model 2. Simplest National income accounting disagregation 3. Simplest form of LPP for the economy. A production sector producing n outputs which are used as intermediate inputs within the sectors, at least one non-reproducible input which is not an output of any of the production process and a demand for output over and above the input use.

A separate consumer sector demands final output and supplies non-reproducible input. So labour is

output and goods and services are inputs. However consumption is not related physically to labour and treated autonomously. Thus the consumer sector may be treated separately from production sector. is, given a vector of final demand (net output) what level of gross output vector will exactly meet the final demand and also support the production activities required to produce these final goods. A static flow model, where social benefit comes from final consumption and social cost comes from the use of labour. In the open model consumption or final demand is independent of supply of labour. The problem

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Description of the economy

We have n production sectors producing (reproducible) commodities and one non-reproducible factor labour with fixed supply. Transactions matrix (in real units) Sector Intermediate input demand to 1 2 3 X11 X21 X31 : Xn1 X12 X22 X32 : Xn2 X13 X23 X33 : Xn3 ... Xnn ... X1n ... X2n ... X3n : Row sum # J=1n X1J J=1n X2J J=1n X3J : J=1n XnJ Total demand L0n J=1n L0J Cn Final Gross demand output @ C1 C2 C3 : Xn Fixed SS L0 X1 X2 X3 :

Sector from 1 2 3 : n

Labour demand L01 L02 L03

# Total intermediate input demand The accounting equations become,

@ Net output/ final demand

X11 + X12 + X13 + ... + X1n + C1 = X1 X21 + X22 + X23 + ... + X2n + C2 = X2 S.1 X31 + X32 + X33 + ... + X3n + C3 = X3 : : : : : : Xn1 + Xn2 + Xn3 + ... + Xnn + Cn = Xn and the labour input constraint, L01 + L02 + L03 +

+ L0n

L0

Row entries are measured in same units. A particular column entry represents input use or cost

structure of that industry. It represents a production point in the production function.


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Inter-industry transactions are not included in GNP. Technology description input-output coefficients

Define, aIJ = XIJ / XJ (amount of ith good directly used to produce one unit of jth good) where i, j = 1, 2, n. Fixed coefficient technology (no substitutability between any pair of inputs is technologically feasible) which can be represented by the following production function Xk = Min [ X1k / a1k , X2k / a2k , Xnk / ank , L0k / a0k ] Thus A = { aIJ ) gives the input coefficient (or technology) matrix. Then, S.1 becomes a11 X1 + a12X2 + a13 X3 + ... + a1nXn + C1 = J=1n a1J XJ + C1 = X1 a21 X1 + a22X2 + a23 X3 + ... + a2nXn + C2 = J=1n a2J XJ + C2 = X2 S.2 a31 X1 + a32X2 + a33 X3 + ... + a3nXn + C3 = J=1n a3J XJ + C3 = X3 : : : : : : : : an1 X1 + an2X2 + an3 X3 + ... + annXn + C1 = J=1n anJ XJ + Cn = Xn and a01 X1 + a02X2 + a03 X3 + ... + a0nXn Or equivalently, in matrix notation, S.3 Ax + c = x and 0 x L0 [IA]x=c where A = { aij } i, j = 1,2,3 n, is the nxn matrix of input-output coefficients (a non-negative square matrix), 0 is the labour input coefficients (1xn row vector), x and c are gross and net output (nx1 column vectors) respectively. Two elements of open ends are incorporated in the model. 1) exogenous final demand vector c originating from the HH sector and 2) at least one non-reproducible factor, namely, labour (owned by the HH sector) whose supply is exogenously fixed at L0 and its price w is also exogenously fixed. = J=1n a0J XJ L0 ; k = 1, 2, n.

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The model is described by the set of equations: [ I A ] x = c (1) in which A is a non-negative matrix of input coefficients, c is a non-negative vector of final demands. We wish to find out a non-negative gross output vector x so that (1) is exactly met. 1)The existence problem: For any given c 0, can we guarantee that there exists an x* 0 such that [ I A ] x* = c ? If so, is such an x* unique? Or, equivalently, 2)The non-singularity problem: Is the matrix [ I A ] nonsingular? If so, is [ I A ]1 > ? One of the necessary and sufficient conditions for an affirmative answer to 1) and 2) is given by the Hawkins-Simon condition. Hawkins-Simon condition: All the successive principal minors of [ I A ] are positive, i.e. 1 a11 > 0, 1 a11 a21 a12 1 a22 > 0, 1 a11 a21 : an1 a12 1 a22 : an2 a1n a2n > 0. : ... 1 ann

Assuming H-S condition is met the required solution to S.3 is x* = [ I A ] 1 c = B c ; where, [ I A ] 1 = B. In matrix notation, x1 x2 : xn or, xi = J=1n biJ cJ ; i = 1, 2, .. n.

b11 b12 b1n b21 b22 b2n : : : bn1 bn2 bnn

c1 c2 : cn

Interpretation of bij

bIJ gives the total (direct plus indirect input requirement) amount of ith sectors output going into the production of one unit of jth sectors net output (final demand). Thus biJ 0. Further assuming full utilization of labour input we have 0 x = L0 which also describes the P.P.F. of the economy. Now, 0 x* = 0 [ I A ] 1 c = 0 B c = L0 Here, 0 B c = L0 represents the consumption (net production) possibility frontier (C.P.F.).
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Economic interpretation of the H-S condition

Consider the case where n = 2. (1 a11 ) X1 a12 X2 = c1 and, L1 a21 X1 + (1 a22 ) X2 = c2 X2 = a21 X1 + c2 L2 (1 a22 ) (1 a22 )

X2 = (1 a11 ) X1 c1 a12 a12

a01 X1 + a02 X2 = L0 ... L3 abc denotes the feasible region of gross production. X2 a 2 c b 1 3 O case-1 X1 O case-2 X1 Note that both L1 and L2 are positively sloped lines, since aiJ > 0 for i j due to interdependence and aii < 1 as direct input requirement from self production must be less than unity. While L1 has a positive intercept on x1 axis and L2 has a positive intercept on x2 axis since c1 and c2 are assumed to be positive. Here, (Case 1) intersection of L1 and L2 in the positive orthant (for viability) requires slope of L1 is greater than L2, i.e. (1 a11) / a12 > a21 / (1 a22)

X2

(1 a11) (1 a22) a12 a21 > 0 ( and 1 a11 > 0 gives H-S condition) 1 > a11 + a12 a21 / (1 a22).

In Case 2, The system is not viable as the lines dont intersect in the positive orthant. If the lines are parallel, the system is viable but fails to generate any surplus i.e. c1 = c2 = 0. The H-S condition becomes, (1 a11) / a12 = a21 / (1 a22) and the solution becomes indeterminate.

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Leontief static open model with 2 - production sectors and one non-reproducible factor a11X1 + a12X2 + c1 = X1 a21X1 + a22X2 + c2 = X2 a01X1 + a02X2 L0 where aiJ = XiJ / XJ ; i,j = 1,2. -1 (1 a11 ) X1 a12 X2 = c1 a21 X1 + (1 a22 ) X2 = c2

X11 + X12 + c1 = X1 X21 + X22 + c2 = X2 L01 + L02 L0

(1 a11 ) a12 a21 (1 a22 )

X1 c1 X2 = c2 T

X1 X2 =

(1 a11) a12 a21 (1 a22 )

c1 c2

Assuming H-S condition is satisfied; X1 X2 = 1/ (1 a22) a21 a12 (1 a11 ) c1 c2 c1 c2 where, = (1 a11 ) (1 a22 ) a12 a21 > 0 (1 a11 ) > 0

= (1 a22)/ a12/ a21/ (1 a11 )/

X1 =

(1 a 22 )c1 a 12 c 2 + = b11 c1 + b12 c 2 where, [ I A ] 1 = B. a 21c1 (1 a 11 )c 2 and X 2 = + = b 21 c1 + b 22 c 2

Here biJ represents the total (direct plus indirect) amount of ith sectors gross output required to produce one unit net output in the jth sector. Using full employment condition: a01 X1 + a02 X2 = L0 a 01 [(1 - a 22 ) c1 + a 12 c 2 ] + a 02 [( a 21 c1 + (1 - a 11 ) c 2 } a01 [b11 c1 + b12 c2 ] + a02 [b21 c1 + b22 c2 ] = L0 [ a01 b11 + a02 b21 ] c1 + [ a01 b12 + a02 b22 ] c2 = L0 01 c1 + 02 c2 = L0 , which gives the C.P.F.

= L0

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~ where a 0 j = a 0i b ij , i,j = 1,2, measures the total (direct plus indirect) labour requirement to generate unit
i =1

level of net output in the Jth sector. Also note that for 01 = [a01 b11 + a02 b21] ; the first/second component measures the total labour requirement originating through sector 1s/2s contribution to generate unit level of net output in the 1st sector. The interpretation for 02 is analogous.

X2 a

(1 a11 ) X1 a12 X2 = c1 .. 1 a21 X1 + (1 a22 ) X2 = c2 .. 2 a01 X1 + a02 X2 = L0 .. 3 abc denotes the feasible region of gross production. 2 c

b 3 O Equivalently, (1 a11 ) X1 a12 X2 = c1 a21 X1 + (1 a22 ) X2 = c2 X1

(1 a11 ) X1 + a12 X2 = c1 a21 (1 a22 ) c2

To produce c 0 , we must have x 0 s.t. # holds. That is possible iff, slope of os is greater than slope of ot i. e. a21 / (1 a11 ) > (1 a22) / a12 i.e. a21 / (1 a11 ) < (1 a22) / a12 i.e. (1 a11 ) (1 a22 ) a12 a21 > 0, which reproduces H-S condition. Unit level operation t : { a12 , (1 a22 )} s : {(1 a11 ) , a21} t c = (c1, c2) t c1 o s s c2

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Price system

Unit profit equation under perfect competition; p1 = a11 p1 + a21 p2 + .. + an1 pn + a01w p2 = a12 p1 + a22 p2 + .. + an2 pn + a02w : In matrix notation; p = ATp + a0w Or equivalently; (1 a11) p1 : a1n p1 i.e. [ I AT ] p = a0w p* = [ I AT ] 1 a0w : a21 p2 .. an1 pn = a01w an2 pn = a02w : : a12 p1 (1 a22) p2 .. : : : : pn = a1n p1 + a2n p2 + .. + ann pn + a0nw

a2n pn .. (1 ann) pn = a0nw

Unit profit equation under perfect competition; p1 = a11 p1 + a21 p2 + a01w p2 = a12 p1 + a22 p2 + a02w [I AT] p = a0w (1 a11) p1 a21 p2 = a01w a12 p1 + (1 a22) p2 = a02w (1 a11) a21 a12 (1 a22) p1 = p2
1

p = AT p + a0w

a01w a02w a01w a02w


T

p1 = (1 a11) a21 p2 a12 (1 a22) = 1/ (1 a22) a12 a21 (1 a11) = (1 a22) a21 a12 (1 a11)

p* = [I AT] 1 a0w

a01w a02w

a01w a02w

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So we have, p1 = p2 = (1 - a 22 ) a 01 w + a 21 a 02 w [ a 01 b11 + a 02 b 21 ] = w = 01 w a 12 a 01 w + (1 - a 11 ) a 02 w [ a 01 b12 + a 02 b 22 ] = w = 02 w

So prices are determined by the total labour content of the product (labour theory of value) Also recollect, [ a01 b11 + a02 b21 ] c1 + [ a01 b12 + a02 b22 ] c2 = L0 01 c1 + 02 c2 = L0 p1c1 + p2c2 = wL0. which states that G.N.P. at market price equals G.N.P. at factor cost.

LPP interpretation: Refer to DORSO Industrial interdependence

There are three possibilities. 1) A is completely decomposable. This gives a system of autonomous independent subsystems. We can partition the industries into subsets s.t. each member of the subset draws inputs only from and sells output only to the members of own subset. A11 A22 x1 + x2 c2 c1 = x2 n-k x1 k

x1* = [ I k A11 ] 1 c1 and x2* = [ I n-k A22 ] 1 c2 2) A is decomposable. The industries are partitioned in such a manner that any member of i-th group draws no inputs from j-th group for i < j but j-th group draws inputs from i-th group. This reflects one way dependence. A11 A12 A22 x1 + x2 c2 c1 = x2 n-k x1 k

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x2* = [ I n-k A22 ] 1 c2 and x1* = [ I k A11 ] 1 { A12 [ I n-k A22 ] 1 c2 + c1 } 3) A is indecomposable. Here we have cases of two-way dependence for any partition. The static Leontief closed model

All inputs are outputs of other firms, i.e. they are reproducible inputs. Nothing comes out of the system and nothing goes into the system. Thus production is a perpetual, self- generating process. Thus we have a input coefficient matrix A nxn to start with. The input coefficient matrix is semi-positive, i.e. every output requires at least one input and every input is used to produce at least one output. If A is non-decomposable, then there is two-way interdependence between any pair of sectors. If A is decomposable then, A11 A12 A22 x1 = x2 x2 (1) (2). A11 x1 + A12 x2 = x1 and A22 x2 = x2 x1

Here x1 depends on x2 but not the reverse, showing a one way interdependence and we have a block recursive system. We can solve x2 from the subsystem (2)and plug back the value in (1) to solve x1. So A must be a semipositive non-decomposable square matrix. Since gross output x >>0, must exactly satisfy the input requirement of the system, Ax = x. [ I A ] x = 0. To obtain a non-trivial solution i.e. x 0, we must have | I A | = 0 which gives the viability condition in the closed model. The closed system is just viable and produces no surplus. If n = 2, we have (1 a11 ) a12 a21 (1 a22 ) x1 x2 = 0 0

x 1 1 - a 11 a = = 21 x2 a 12 1 - a 22

Thus the scale of the economy is indeterminate.

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