LINEAR MODELS AND

MATRIX ALGEBRA

Chapter 4
Alpha Chiang, Fundamental Methods of
Mathematical Economics
3
rd
edition
Why Matrix Algebra
As more and more commodities are included
in models, solution formulas become
cumbersome.
Matrix algebra enables to do us many things:
provides a compact way of writing an equation
system
leads to a way of testing the existence of a
solution by evaluation of a determinant
gives a method of finding solution (if it exists)

Catch
Catch: matrix algebra is only applicable
to linear equation systems.
However, some transformation can be
done to obtain a linear relation.

y = ax
b
log y = log a + b log x
Matrices and Vectors
Example of a system of linear equations:
c
1
P
1
+ c
2
P
2
= -c
0


1
P
1
+
2
P
2
= -
0
In general,
a
11
x
1
+ a
12
x
2
++ a
1n
X
n
= d
1
a
21
x
1
+ a
22
x
2
++ a
2n
X
n
= d
2


a
m1
x
1
+ a
m2
x
2
++ a
mn
X
n
= d
m
coefficients a
ij

variables x
1, ,
x
n

constants d
1
, ,d
m


Matrices as Arrays

11 12 1 1 1
21 22 2 2 2
1 2
n
n
m m mn n
a a a x d
a a a x d
A x d
a a a x dm
( ( (
( ( (
( ( (
= = =
( ( (
( ( (

Example:
6x
1
+ 3x
2
+ x
3
= 22
x
1
+ 4x
2
+-2x
3
=12
4x
1
- x
2
+ 5x
3
= 10

1
2
3
6 3 1 22
1 4 2 12
4 1 5 10
x
A x x d
x
( ( (
( ( (
= = =
( ( (
( ( (

Definition of Matrix
A matrix is defined as a rectangular array of
numbers, parameters, or variables.
Members of the array are termed elements
of the matrix.

Coefficient matrix:
A=[a
ij
]


1, 2,...,
1, 2,...,
i m
j n
=
| |
|
=
\ .
Matrix Dimensions
Dimension of a matrix = number of rows x
number of columns, m x n
m rows
n columns
Note: row number always precedes the
column number. this is in line with way the
two subscripts are in a
ij
are ordered.
Special case: m = n, a square matrix
Vectors as Special Matrices
one column : column vector
one row: row vector
usually distinguished from a column vector by
the use of a primed symbol:
Note that a vector is merely an ordered n-
tuple and as such it may be interpreted as a
point in an n-dimensional space.

Matrix Notation
Ax = d

Questions: How do we multiply A and x?
What is the meaning of equality?
Example
Q
d
= Q
s

Q
d
= a - bP
Q
s
= -c + dP
can be rewritten as
1Q
d
1Q
s
= 0
1Q
d
+ bP = a
0 +1Q
s
+-dP = -c

1 1 0 0
1 0
0 1
d
s
Q
b Q a
d P c

( ( (
( ( (
=
( ( (
( ( (


In matrix form
Coefficient matrix
Constant vector
Variable
vector
Matrix Operations
Addition and Subtraction: matrices must
have the same dimensions
Example 1:


Example 2:


4 9 2 0 4 2 9 0 6 9
2 1 0 7 2 0 1 7 2 8
+ +
( ( ( (
+ = =
( ( ( (
+ +

11 12 11 12 11 11 12 12
21 22 21 22 21 21 22 22
31 32 31 32 31 31 32 32
a a b b a b a b
a a b b a b a b
a a b b a b a b
+ +
( ( (
( ( (
+ = + +
( ( (
( ( ( + +

Matrix addition and
subtraction
In general



Note that the sum matrix must have the same
dimension as the component matrices.
ij ij ij ij ij ij
a b c where c a b ( ( ( + = = +

Matrix subtraction
Subtraction



Example
19 3 6 8 19 6 3 8 13 5
2 0 1 3 2 1 0 3 1 3

( ( ( (
= =
( ( ( (


ij ij ij ij ij ij
a b d where d a b ( ( ( = =

Scalar Multiplication
To multiply a matrix by a number by a scalar is to multiply every
element of that matrix by the given scalar.





Note that the rationale for the name scalar is that it scales up or down
the matrix by a certain multiple. It can also be a negative number.
3 1 21 7
7
0 5 0 35

( (
=
( (

1 1
11 12 11 12 2 2
1
2
1 1
21 22 21 22 2 2
a a a a
a a a a
( (
=
( (

11 12 1 11 12 1
21 22 2 21 22 2
1
a a d a a d
a a d a a d

( (
=
( (


Matrix Multiplication
Given 2 matrices A and B, we want to find the product AB. The
conformability condition for multiplication is that the column
dimension of A (the lead matrix) must be equal to the row
dimension of B ( the lag matrix).






BA is not defined since the conformability condition for
multiplication is not satisfied.
| |
11 12 13
11 12
1 2 2 3
21 22 23
x x
b b b
A a a B
b b b
(
= =
(

Matrix Multiplication
In general, if A is of dimension m x n and B is of
dimension p x q, the matrix product AB will be
defined only if n = p.
If defined the product matrix AB will have the
dimension m x q, the same number of rows as the
lead matrix A and the same number of columns as
the lag matrix B.

mxn pxq mxq
A B C =
Matrix Multiplication
Exact Procedure

| |
| |
11 12 13
11 12
1 2 2 3
21 22 23
11 12 13
1 3
11 11 11 12 21
12 11 12 12 22
13 11 13 12 23
where:



x x
x
b b b
A a a B
b b b
AB c c c
c a b a b
c a b a b
c a b a b
(
= =
(

=
= +
= +
= +
Matrix multiplication
Example : 2x2, 2x2, 2x2

3 4 1 0
5 6 4 7
3( 1) 4(4) 3(0) 4(7) 13 28
5( 1) 6(4) 5(0) 6(7) 19 42
A and B
AB

( (
= =
( (

+ +
( (
= =
( (
+ +

Matrix multiplication
Example: 3x2, 2x1, 3x1
(3 2) (2 1) (3 1)
1 3 1(5) 3(9) 32
5
2 8 2(5) 8(9) 82
9
4 0 4(5) 0(9) 20
x x x
A B AB
+
( ( (
(
( ( (
= = = + =
(
( ( (

( ( (
+

Matrix multiplication
Example: 3x3, 3x3, 3x3









Note, the last matrix is a square matrix with 1s in its principal diagonal
and 0s everywhere else, is known as identity matrix
3 1 2 0 1/ 5 3/10
1 0 3 1 1/ 5 7 /10
4 0 2 0 2/ 5 1/10
3 1 4 9 7 2
0 1 0
5 10
1 0 0
1 0 6 3 0 3
0 0 0 0 1 0
5 10
0 0 1
4 0 4 12 0 2
0 0 0
5 10
A B
AB

( (
( (
= =
( (
( (

+
(
+ +
(
(
(
+ + +
(
(
= + + =
(
(
(
(

+ + +
(
+ +
(

Matrix multiplication
from 4.4, p56







The product on the right is a column vector
1
2
3
1 1 2 3
2 1 2 3
3 1 2 3
6 3 1 22
1 4 2 12
4 1 5 10
6 3 1 6 3
1 4 2 4 2
4 1 5 4 5
x
A x x d
x
x x x x
Ax x x x x
x x x x
( ( (
( ( (
= = =
( ( (
( ( (

+ +
( ( (
( ( (
= = +
( ( (
( ( ( +

Matrix multiplication
When we write Ax= d, we have
1 2 3
1 2 3
1 2 3
6 3 22
4 2 12
4 5 10
x x x
x x x
x x x
+ +
( (
( (
+ =
( (
( (
+

Simple national income model
Example : Simple national income model with
two endogenous variables, Y and C

Y = C + Io + Go
C = a + bY
can be rearranged into the standard format

Y C = Io Go
-bY + C = a

Simple national income model
Coefficient matrix, vector of variables, vector of constants






To express it in terms of Ax=d,
0 0
1 1
1
Y I G
A x d
b C a
+
( ( (
= = =
( ( (

1 1 1( ) ( 1)( )
1 1( )
Y Y C Y C
Ax
b C bY C bY C
+
( ( ( (
= = =
( ( ( (
+ +

Simple national income model
Thus, the matrix notation Ax=d would give us






The equation Ax=d precisely represents the original equation
system.
0 0
Y C I G
bY C a
+
( (
=
( (
+

Digression on notation:
Subcripted symbols helps in designating the locations
of parameters and variables but also lends itself to a
flexible shorthand for denoting sums of terms, such
as those which arise during the process of matrix
multiplication.



j: summation index
x
j
: summand
3
1 2 3
1
j
j
x x x x
=
+ + =

Digression on notation:

7
3 4 5 6 7
3
0 1
0
i
i
n
k n
k
x x x x x x
x x x x
=
=
= + + + +
= + + +

Digression on notation:
The application of E notation can be readily extended to cases in which
the x term is prefixed with a coefficient or in which each term in the
sum is raised to some integer power.
3 3
1 2 3 1 2 3
1 1
3
1 1 2 2 2 3
1
0 1 2
0 1 2
0
2
0 1 2
( )
j j
j j
j j
j
n
j n
i n
i
n
n
ax ax ax ax a x x x a x
a x a x a x a x
a x a x a x a x a x
a a x a x a x
= =
=
=
= + + = + + =
= + +
= + + + +
= + + + +

-general polynomial function

Digression on notation:
Applying to each element of the product
matrix C=AB

2
11 11 11 12 21 1 1
1
2
12 11 12 12 22 1 2
1
2
13 11 13 12 23 1 3
1
k k
k
k k
k
k k
k
c a b a b a b
c a b a b a b
c a b a b a b
=
=
=
= + =
= + =
= + =

Digression on notation:
Extending to an m x n matrix, A=[a
ik
] and an
n x p matrix B=[b
kj
], we may now write the
elements of the m x p matrix AB=C=[c
ij
] as


or more generally,

11 1 1 12 1 2
1 1
n n
k k k k
k k
c a b c a b
= =
= =

1,2,...,
1 1,2,...,
1
n
i m
ij k kj j p
k
c a b
| |
=
|
=
\ .
=
=