Chapter 4

LINEAR MODELS AND MATRIX ALGEBRA

As more and more commodities are included in models, solution formulas become
cumbersome.
Matrix algebra enables to do us many things:
1. provides a compact way of writing an equation system
2. leads to a way of testing the existence of a solution by evaluation of a
determinant
3. gives a method of finding solution (if it exists)
Catch: matrix algebra is only applicable to linear equation systems. Some
transformation can be done to obtain a linear relation.
y = ax
b
log y = log a + b log x
Matrices and Vectors
c
1
P
1
+ c
2
P
2
= -c
0

1
P
2
+
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
21 22 2
1 2
n
n
m m mn
a a a
a a a
A
a a a
1
1
1

1
1
1
]
L
L
L L L L
L
1
2
n
x
x
x
x
1
1
1

1
1
1
]
M
1
2
d
d
d
dm
1
1
1

1
1
]
M
1
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
1 1 1
1 1 1

1 1 1
1 1 1
] ] ]
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
_

,
Vectors as Special Matrices
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, square matrix
one column : column vector
one row: row vector
usually distinguished from a column vector by the use of a primed symbol:
[ ]
1 2
'
n
x x x x L
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?
Exercise (p60):
Q
d
= Q
s
Q
d
= a - bP
Q
s
= -c + dP
2
can be rewritten as
1Q
d
1Q
s
=0
1Q
d
+bP =a
0 +1Q
s
+-dP =-c
Coefficient matrix
1 1 0
1 0
0 1
b
d
1
1
1
1
]
Constant vector
0
a
c
1
1
1
1
]
Matrix Operations
Addition and Subtraction
- must have the same dimension
Example 1
4 9 2 0 4 2 9 0 6 9
2 1 0 7 2 0 1 7 2 8
+ + 1 1 1 1
+
1 1 1 1
+ +
] ] ] ]
Example 2
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
+ + 1 1 1
1 1 1
+ + +
1 1 1
1 1 1 + +
] ] ]
In general
ij ij ij ij ij ij
a b c where c a b 1 1 1 + +
] ] ]
Note that the sum matrix must have the same dimension as the component matrices.
Subtraction:
ij ij ij ij ij ij
a b d where d a b 1 1 1
] ] ]
3
Example
19 3 6 8 19 6 3 8 13 5
2 0 1 3 2 1 0 3 1 3
1 1 1 1

1 1 1 1

] ] ] ]
Scalar Multiplication:
To multiply a matrix by a number by a scalar is to multiply every element of
that matrix by the given scalar.
3 1 21 7
7
0 5 0 35
1 1

1 1
] ]
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
1 1

1 1
] ]
Note that the rational for the name scalar is that it scales up or down the matrix by a
certain multiple. It can also be a negative number.
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
1 1

1 1

] ]
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).
[ ]
11 12 13
11 12
21 22 23
b b b
A a a B
b b b
1

1
]
(1x2) (2x3)
BA is not defined since the conformability condition for multiplication is not satisfied.
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.
4
Exact Procedure
[ ]
[ ]
11 12 13
11 12
21 22 23
11 12 13
11 11 11 12 21
12 11 12 12 22
13 11 13 12 23
where:



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
1

1
]

+
+
+
Examples:
2x2,2x2,2x2
Example 7
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
1 1

1 1
] ]
+ +
1 1

1 1
+ +
] ]
Example 8
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
+ 1 1 1
1
1 1 1
+
1
1 1 1
]
1 1 1 +
] ] ]
Example 9
3x3, 3x3, 3x3
3 1 4 9 7 2
0 1 0
5 10
3 1 2 0 1/ 5 3/10 1 0 0
1 0 6 3 0 3
1 0 3 1 1/ 5 7 /10 0 0 0 0 1 0
5 10
4 0 2 0 2/ 5 1/10 0 0 1
4 0 4 12 0 2
0 0 0
5 10
A B AB
+
1
+ +
1
1 1 1
1
+ + +
1 1 1
1
+ +
1 1 1
1
1 1 1 1
] ] ]
+ + +
1
+ +
1
]
Note, the last matrix is a square matrix with 1s in its principal diagonal and 0s
everywhere else, is known as identity matrix.
5
fr 4.4, p56
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
1 1 1
1 1 1

1 1 1
1 1 1
] ] ]
+ +
1 1 1
1 1 1
+
1 1 1
1 1 1 +
] ] ]
The product on the right is a column vector
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
+ + 1 1
1 1
+
1 1
1 1 +
] ]
Example 11: 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
Coefficient matrix, vector of variables, vector of constants
0 0
1 1
1
Y I G
A x d
b C a
+ 1 1 1

1 1 1

] ] ]
To express it in terms of Ax=d,
6
1 1 1( ) ( 1)( )
1 1( )
Y Y C Y C
Ax
b C bY C bY C
+ 1 1 1 1

1 1 1 1
+ +
] ] ] ]
Thus, the matrix notation Ax=d would give us
0 0
Y C I G
bY C a
+ 1 1

1 1
+
] ]
The equation Ax=d precisely representx the original equation system.
BTW = NOT POSSIBLE TO DIVIDE ONE MATRIX BY ANOTHER !!!
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
arose during the process of matrix multiplication.
3
1 2 3
1
j
j
x x x x

+ +

j: summation index
x
j
: summand
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

+ + + +
+ + +

L
The application of 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

+ + + +
+ +
+ + + +
+ + + +

L
L
- the last example can be used as a shorthand of the general polynomial
function
7
Study the digression on notation (pp.64-65)
Exercises: 4.2 # 1, 2, 3, 4
- whenever the context of the discussion leave no ambiguity as to the range of
the summation, the symbol can be used alone, without an index attached.
Applying to 4.6 each element of the product matrix C=AB is defined as a sum of terms
which may be rewritten as follows:
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

+
+
+

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



L
or more generally,
1
1
1, 2,...,
1, 2,...,
n
ij k kj
k
i m
c a b
j p

4.3 NOTES ON VECTOR OPERATIONS

- vectors are considered as special types of matrix
- has dimensional peculiarities.
Multiplication of vectors
An m x 1 column vector u, and a 1 x n row vector v, yield a product uv of dimension
m x n. On the other hand, a 1 x n row vector u and an n x 1 column vector v, the
product uv will be of dimension 1 x 1.
Example 1. Given
3
2
u
1

1
]
and [ ]
' 1 4 5 v
, we can get
3(1) 3(4) 3(5) 3 12 15
'
2(1) 2(4) 2(5) 2 8 10
uv
1 1

1 1
] ]
8
Example 2: Given u [3 4] and
9
7
v
1

1
]
, we have
uv = [3(9) + 4(7)] = [55] - a scalar product
As written, uv is a matrix, despite the fact that only a single element is present.
- 1 x 1 matrices behave exactly like scalars with respect o addition and
multiplication: [4] + [8] =[12], [3][7]=[21]
- a scalar product
Example 3.
Given a row vector u = [3 6 9], find uu. Since u is merely a column vector,
with elements of u arranged vertically, we have,
[ ]
2 2 2
3
' 3 6 9 6 (3) (6) (9)
9
u u
1
1
+ +
1
1
]
Note that the product uu gives the sum of squares of the elements of u.
In general, if u = [ u
1
u
2
u
n
], then uu will be the sum of squares (a scalar) of the
elements of u
j.
2 2 2 2
1 1
1
'
n
n j
j
u u u u u u

+ + +

L
Linear Dependence
A set of vectors v
1
, ,v
n
is linearly dependent if and only if any one of them can be
expressed as a linear combination of the remaining vectors; otherwise, they are linearly
independent.
Example 4. The three vectors
1 2 3
2 1 4
, ,
7 8 5
v v and v
1 1 1

1 1 1
] ] ]
are linear dependent because v3 is a linear combination of v1 and v2:
1 2 3
6 2 4
3 2
21 16 5
v v v
1 1 1

1 1 1
] ] ]
or 3v
1
2v
2
-v
3
=0
where
0
0
0
1

1
]
represents a null vector (also called zero vector)
Example 5. v
1
=[5 12] and v
2
= [10 24] are linearly dependent because
9
2v
1
= 2[5 12] = [10 24] = v
2

or 2v
1
-v
2

=

0
A set of m-vectors v
1
, ,v
n
is linearly dependent if and only if there exists a set of
scalars k
1
, , k
n
(not all zero) such that
1
0
n
i i
i
k v

4.4 COMMUTATIVE, ASSOCIATIVE, AND DISTRIBUTIVE LAWS

In ordinary scalar algebra, additive and multiplicative operations obey the commutative,
associative, and distributive laws:
Commutative law of addition a + b = b + a
Commutative law of multiplication ab = ba
Associative law of addition (a+b) + c = a+ (b+c)
Associative law of multiplication ab (c) = a(bc)
Distributive law a (b+c) = ab + ac
Matrix Addition: commutative and associative
Commutative law : A+B=B+A
3 1 6 2
,
0 2 3 4
9 3
3 6`
Given A and B we find that
A B B A
1 1

1 1
] ]
1
+ +
1
]
Associative law: (A+B) + C = A + (B+C)
Given
1 2 3
1 2 3
1 2 3
3 9 2
, , ,
4 1 5
12 2 10
( )
5 5 0
3 7 10
( ( )
4 4 0
v v and v
v v v
v v v
1 1 1

1 1 1
] ] ]
1 1 1
+
1 1 1
] ] ]
1 1 1
+ +
1 1 1
] ] ]
10
Matrix Multiplication: not commutative
If the products are defined:
Example:
1 2 0 1
3 4 6 7
12 13 3 4
,
24 25 27 40
AB BA
Let A B then
AB BA

1 1

1 1
] ]
1 1

1 1
] ]
Example: Let u be a 1x3 (a row vector); then the corresponding column vector u must
be 3x1. The product uu will be 1x1 but the product uu will be 3x3. Thus obviously,
uu uu.
Exceptions:
- A is a square matrix and B is an identity matrix
- A is the inverse of B, A = B
-1
- scalar multiplication: kA=Ak
Associative Law: (AB)C=A(BC)=ABC
Conformability condition: A is mxn, B is n xp, C is pxq
Distributive Law: A(B+C) = AB + AC [premultiplication by A]
(B+C)A = BA + CA [postmultiplication by A]
4.5 IDENTITY MATRICES AND NULL MATRICES
2 3
1 0 0
1 0
0 1 0
0 1
0 0 1
I I
1
1
1

1
1
]
1
]
Characteristics:
like number 1: a(1) = (1)a=a
IA = AI = A
Example: Let
1 2 3
2 0 3
A
1

1
]
11
Special Nature of I Matrices
- it is possible to insert or delete an I w/o affecting the matrix product.
2
( )
Interesting case: if:
( )
( )
mxn nxn nxp
n
n n n
k
n n
A I B AI B AB
A I
AI I I
I I

Inverses and their Properties:

For a given matrix A,
- The transpose is always derivable. Its inverse matrix (another type of
derived matrix) may or may not exist.
- The inverse of matrix A is denoted by A
-1
is defined only if A is a square
matrix.
1 1
AA AA I

1 1
1 1 1
1 1
( )
( )
( ') ( ) '
A A
AB B A
A A

1 1
AA AA I

Whether A is pre-multiplied or postmultiplied by A

-1
, the product will be the same
identity matrix. This is an exception to the rule that matrix multiplication is not
commutative.
Points to note:
1. Not every square matrix has an inverse. Squareness is a necessary but not a
sufficient condition for the existence of a matrix.
a. Non-singular matrix : if an inverse exists
b. Singular : if no inverse exists
2. If A
-1
exists, then A is the inverse of A
-1
just as A
-1
is the inverse of A. A and A
-
1
are inverses of each other.
3. If A is nxn, then A
-1
must also be nxn.
4. If an inverse exists, it is unique.
AB=BA=I
Define C such that AC=CA=I
Premultiplying both sides of AB=I by C,
CAB=CI=C
Since CA=I, IB=C or B=C
That is, B and C must be one and the same inverse matrix.
12
The inverse of an inverse is the original matrix.
The inverse of a product is the product of the inverses in reverse order.
The inverse of the transpose is the transpose of the inverse.
1 1
1 1 1
1 1
( )
( )
( ') ( ) '
A A
AB B A
A A

Proof: Suppose that the inverse of AB is C. We know that CAB=I

CABB
-1
A
-1
=IB
-1
A
-1
(=B
-1
A
-1
)
But the left side is reducible to
CA(BB
-1
)A
-1
=CAIA
-1
=CAA
-1
=CI=C
Substituting to the original equation,
C= B
-1
A
-1
Or in other words, the inverse of AB is equal to B
-1
A
-1
.
Given A, what is the inverse D?
By definition, DA=I.
But (AA
-1
)=I=I.
Thus, DA=(AA
-1
)
=(A
-1
)A
Postmultiplying both sides by (A
-1
), we obtain
DA(A

)
1
= (A
-1
)A(A)
-1
Or D=(A
-1
)
Thus the inverse of A is equal to (A
-1
).
Inverse Matrix and Solution of Linear Equation System
The application of the concept of inverse matrix to the solution of simultaneous
equation system is immediate and direct.
1 1
1
Ax d
A Ax A d
x A d

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

1 1 1
1 1 1
] ] ]
4.4, p.56
13
1
2
3
18 16 10 2
1
13 26 13 3
52
17 18 21 1
x
x
x
1 1 1
1 1 1

1 1 1
1 1 1
] ] ]
One way of finding the solution of a linear equation system Ax=d, where the
coefficient matrix is nonsingular, first find A
-1
, and then post multiply A
-1
by the
constant vector d. The product A
-1
d will then give the solution values of the
variables.
14