Ch.

5 Linear Models & Matrix Algebra

5.1 Conditions for Nonsingularity of a Matrix

5.2 Test of Nonsingularity by Use of Determinant
5.3 Basic Properties of Determinants
5.4 Finding the Inverse Matrix
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
5.1 Conditions for Nonsingularity of a Matrix
3.4 Solution of a General-equilibrium System (p. 44)

 x+y=8 1 1  x  8
x+y=9 1 1  y   9
(inconsistent &     
dependent)
 2x + y = 12 2 1  x  12 
4x + 2y= 24 4 2  y   24
    
(dependent)
 2x + 3y = 58 2 3   x  58
y = 18 0 1   y   18 
x + y = 20     
(over identified & 1 1    20
dependent)
2
5.1 Conditions for Non-singularity of a Matrix
3.4 Solution of a General-equilibrium
y
System (p. 44)
x+y=9

 Sometimes equations
are not consistent, and
x+y=8

they produce two x

parallel lines. y

(contradict) 12

 Sometimes one For both the

equations

equation is a multiple Slope is -1

of the other.
(redundant)
3
5.1 Conditions for Non-singularity of a Matrix
Necessary versus sufficient conditions
Conditions for non-singularity
Rank of a matrix

 A) Square matrix , i.e., n. equations = n.

unknowns. Then we may have unique
solution. (nxn , necessary)
 B) Rows (cols.) linearly independent
(rank=n, sufficient)
 A & B (nxn, rank=n) (necessary &
sufficient), then nonsingular

4
5.1 Elementary Row Operations (p. 86)

 Interchange any two rows in a matrix

 Multiply or divide any row by a scalar k (k  0)
 Addition of k times any row to another row
These operations will:
◦ transform a matrix into a reduced echelon
matrix (or identity matrix if possible)
◦ not alter the rank of the matrix
◦ place all non-zero rows before the zero rows
in which non-zero rows reveal the rank

5
5.1 Conditions for Nonsingularity of a Matrix
Conditions for non-singularity, Rank of a matrix (p. 86)
0  11 4 1 0 0
 
2 6 2 0 1 0 swap rows 1 & 3

4 1 0 0 0 1

4 1 0 0 0 1  *1 4
 
2 6 2 0 1 0

0  11 4 1 0 0
1 1 4 0 0 0 1 4  * 2
 
2 6 2 0 1 0  

0  11 4 1 0 0 
1 1 4 0 0 0 1 4 
 
0 11 2 2 0 1  1 2  * 2 11

0  11 4 1 0 0  
1 1 4 0 0 0 1 4 
 
0 1 4 11 0 2 11  1 11 *11

0  11 4 1 0 0 
 
1 1 4 0 0 0 1 4 
 
0 1 4 11 0 2 11  1 11

0 0 0 1 2 1 
6
5.1 Conditions for Non-singularity of a Matrix
Conditions for non-singularity, Rank of a matrix (p. 96)
Elementary row operations
4 1 2 1 0 0 1 0 3 0 0 1 
   
5 2 1 0 1 0 swap rows 1 & 3
0 1  7 0 1 2  5 2
1 0 3 0 0 1 0 0  3 1  1 2  3 2 *  1 3
1 0 3 0 0 1 * 5 1 0 3 0 0 1 
   
5 2 1 0 1 0  1 7 0 1 2  5 2 
0
4 1 2 1 0 0 0 0 1  1 3 1 6 1 2  * 7
1 0 3 0 0 1 1 0 3 0 0 1 
   
0 2  14 0 1  5 *1 2 1 0 7 3 5 3 1 
0
4 2 1 0 0  0
1 0 1  1 3 1 6 1 2 * 3
1 0 3 0 0 1  * 4 1 0 0 1  1 2  1 2
   
0 1  7 0 1 2  5 2 1 0 7 3 5 3
0 1 
4 0   0
1 2 1 0 0 1 1 3 1 6 1 2 
1 0 3 0 0 1 
 
0 1  7 0 1 2  5 2 * 1
0 1  10 1 0  4  

7
5.1 Conditions for Nonsingularity of a Matrix
Conditions for non-singularity, Rank of a matrix (p. 96)

4 1 2
1 0 3 0 0 1 
A  5 2 1   
 0 1  7 0 1 2  5 2 
1 0 3
0 0  3 1  1 2  3 2 *  1 3
Determinan t of A  6
1 0 3 0 0 1 
 6 - 14 - 2  
1 7 0 1 2  5 2 
Cofactors of A  - 3 10 1  0
0 0 1  1 3 1 6 1 2  * 7
- 3 6 3 
 6 - 3 - 3 1 0 3 0 0 1 
 
Adjoint A  - 14 10 6  0 1 0 7 3 5 3 1
 - 2 1 3  0 0 1  1 3 1 6 1 2 * 3
 6 -3 - 3 1 0 0 1  1 2  1 2
1
Inverse of A  - 14 10 6   
0 1 0 7 3 5 3 1 
6
 - 2 1 3  0 0 1 1 3 1 6 1 2 

8
5.1 Conditions for Non-singularity of a Matrix
Conditions for non-singularity, Rank of a matrix (p. 96)

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
 6 - 3 - 3 A  6;
A -1  - 14 10 6 
1
A1  3; A2  2; A3  5;
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   - 2 1 3  3
x  1 2; y  1 3; z  5 6

9
5.2 Test of Non-singularity by Use of Determinant
Determinants and non-singularity
Evaluating a third-order determinant
Evaluating an nth order determent by Laplace expansion

 Determinant |A| is a uniquely defined scalar

associated w/ a square matrix A
(Chiang & Wainwright, p. 88)

 |A| defined as the sum of all possible products

t(-1)t a1j a2k…ang, where the series of second
subscripts is a permutation of (1,.., n) including
the natural order (1, …, n), and t is the number
of transpositions required to change a
permutation back into the original order
(Roberts & Schultz, p. 93-94)

 t equals P(n,r)=n!/(n-r)!, i.e., the permutation of

n objects taken r at a time
10
5.2 Test of Non-singularity by Use of
Determinant

 P(n,r) = n!/(n-r)! P(2,2) = 2!/(2-2)! = 2

 There are only two ways of arranging
subscripts (i,k) of product (-1)ta1ja2k either
(1,2) or (2,1)
 The first permutation is even & positive (-1)2
and second is odd and negative (-1)1
 0!=(1) =1
1!=(1) =1
2!=(2)(1) =2
3!=(3)(2)(1) =6
4!=(4)(3)(2)(1) = 24
5!=(5)(4)(3)(2)(1) = 120
6!=(6)(4)(3)(2)(1) = 720
… …
10! =3,628,800
11
5.2 Test of Non-singularity by Use of
Determinant and permutations: 2x2 and 3x3

a11 a12
A  a11a22  a21a12  scalar
a21 a22
a11 a12 a13
A  a21 a22 a 23
a 31 a 32 a 33
 a11a 22a 33  a12a 23a 31  a13a 21a 32
a11a 32a 23  a12a 21a 33  a13a 22a 31  scalar
n
A   a1 j C2 j  scalar
j 1

12
5.2 Test of Non-singularity by Use of
Determinant : 4 x 4 permutations = 24

Abcd Bacd Cabd Dabc

Abdc Badc Cadb Dacb
Acbd Bcad Cbad Dbac
Acdb Bcda Cbda Dbca
Adbc Bdac Cdab Dcab
Adcb Bdca Cdba Dcba

13
5.2 Evaluating a third-order determinant
Evaluating an 3 order determent by Laplace expansion
Laplace Expansion by cofactors;
if /A/ = 0, then /A/ is singular, i.e., under identified

a11 a12 a13

a 22 a 23
A  a 21 a 22 a 23 M 11 
a32 a33
a31 a32 a33
a 21 a 23
n M 12 
A   a1 j C1 j
a31 a33
j 1 a 21 a 22
M 13 
a31 a32
Cij   1
i j
M ij

14
5.2 Determinants
 Pattern of the signs for cofactor minors

     







  
    
   
   

Cij   1
i j
M ij
15
5.1 Conditions for Nonsingularity of a Matrix
Conditions for non-singularity, Rank of a matrix (p. 96)

4 1 2
1 0 3 0 0 1 
A  5 2 1   
 0 1  7 0 1 2  5 2 
1 0 3
0 0  3 1  1 2  3 2 *  1 3
Determinan t of A  6
1 0 3 0 0 1 
 6 - 14 - 2  
1 7 0 1 2  5 2 
Cofactors of A  - 3 10 1  0
0 0 1  1 3 1 6 1 2  * 7
- 3 6 3 
 6 - 3 - 3 1 0 3 0 0 1 
 
Adjoint A  - 14 10 6  0 1 0 7 3 5 3 1
 - 2 1 3  0 0 1  1 3 1 6 1 2 * 3
 6 -3 - 3 1 0 0 1  1 2  1 2
1
Inverse of A  - 14 10 6   
0 1 0 7 3 5 3 1 
6
 - 2 1 3  0 0 1 1 3 1 6 1 2 

16
5.1 Conditions for Non-singularity of a Matrix
Conditions for non-singularity, Rank of a matrix (p. 96)

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
 6 - 3 - 3 A  6;
A -1  - 14 10 6 
1
A1  3; A2  2; A3  5;
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   - 2 1 3  3
x  1 2; y  1 3; z  5 6

17
5.2 Evaluating a determinant
 Laplace expansion of a 3rd order determinant
by cofactors. If /A/ = 0, then singular
9 8 7
5 4 6 4 6 5
A  6 5 4 9 8 7
2 1 3 1 3 2
3 2 1
 95  8  86  12  7 12  15  27  48  21  0

18
5.2 Test of Non-singularity by Use of
Determinant
1 2 3  P(3,3) = 3!/(3-3)! = 6
 
A   4 5 6
 |A| = 1(5)9 + 2(6)7 + 3(8)4
-3(5)7 – 6(8)1 – 9(4)2
7 8 9  Expansion by cofactors
|A|= (1)c11 + (2)c12 + (3)c13
C11 = 5(9) – 6(8)
C12 = -4(9) + 6(7)
C13 = 4(8) – 7(5)
Expansion across any row or
column will give the same
# for the determinant

19
 5.3 Basic Properties of Determinants
Properties I to III (related to elementary row operations)

I. The interchange of any two rows will

alter the sign but not its numerical value
II. The multiplication of any one row by a
scalar k will change its value k-fold
III. The addition of a multiple of any row to
another row will leave it unaltered.

20
 5.3 Basic Properties of Determinants
Properties IV to VI

IV. The interchange of rows and columns

does not affect its value
V. If one row is a multiple of another row,
the determinant is zero
VI. The expansion of a determinant by alien
cofactors produces a result of zero

21
5.3 Basic Properties of Determinants
Properties I to V

 /A/ = /A'/ • If /A/  0

 Changing rows or col. • Then
does not change # but – A is nonsingular
changes the sign of /A/
– A-1 exists
 k(row) = k/A/
– A unique solution
 ka ± row or col.b =/A/ to
 If row or col a=kb, then X=A-1d exists
/A/ =0

22
5.4 Finding the Inverse
aka “the hard way”
 Steps in computing the Inverse Matrix and
solving for x
1. Find the determinant |A| using expansion by
cofactors.
If |A| =0, the inverse does not exist.
2. Use cofactors from step 1 and complete the
cofactor matrix.
3. Transpose the cofactor matrix => adjA
4. Divide adj.A by |A| => A-1
5. Post multiply matrix A-1 by column vector of
constants d to solve for the vector of variables x

23
  1  1  1 Y  1 1 1   I0 
A=  b 1 0  C   1 b 1  g b  a  bT 
    1 b  g   0
 g 0 1  G   g g 1  b  0 
 1  1  1
A    b 1 0   1  b  g 
 g 0 1  I 0  a  bT0
Y
1  b  g 
1 b g 
1 1  g g  bI 0  1  g a  bT0 
C
1  b  g 
C=
 
1 b 1  b
g I 0  a  bT0 
1 1 1  G
C’= b 1  g b  1  b  g 
 
 g g 1  b
24
5.4 Finding the Inverse Matrix
Expansion of a determinant by alien cofactors,
Property VI, Matrix inversion

 Expansion by alien n

cofactors yields /A/=0 A   a1 j C 2 j  0

j 1

 This property of
determinants is
important when
defining the inverse
(A-1)

25
5.4 A Inverse (A )
-1

 Inverse of A is A-1
 if and only if A is square (nxn) and rank
=n
 AA-1 = A-1A = I
 We are interested in
A-1 because x=A-1d

26
5.4 matrix A: matrix of parameters from the
equation Ax=d

a11 a12  a1n

a21 a22  a2 n
A
nxn   
an1 an 2  ann

27
C: Matrix of cofactors of A

 C11 C12  C1n 

 
 C C22  C2 n 
C 21
    
 
 Cn1 Cn 2  Cnn 

28
C' or adjoint A: Transpose matrix of the
cofactors of A

 C11 C21  Cn1 

 
 C12 C22  Cn 2 
C     adj A
nxn
   
C C2 n  Cnn 
 1n 

29
AC'

 a11 a12  a1n   C11 C21  Cn1 

a   
 21 a 22  a 2 n 
 
C12 C22  Cn 2 

        
  C C2 n  Cnn 
 n1
a a n2  a nn   1n 

30
 Matrix AC'
n n n

 a1 j C1 j  a1 j C2 j   a1 j Cnj 
 j 1 j 1 j 1

 
n n n

 a2 j C1 j  a2 j C2 j   a2 j Cnj 
 j 1 j 1 j 1

AC    
nxn  
 
   
n 
 a C 
n n

 nj 1 j  a nj C 2j   a nj C nj 

 j 1 j 1 j 1

 
31
 A 0  0 1 0  0
  0 1  0 
 0 A  0
AC    A    A In
     
   
 0 0  A  0 0  1 

32
Inverse of A
C
AC  A I n 1 1
A A A I
A
AC  C
I A 1

A A

C C
A I x  d
*

A A
33
Solving for X using Matrix Inversion
adjA
x 
*
d
A

 x1   C11 C21  Cn1   d1 

x    d 
 2  1  C12 C22  Cn 2   2 
    
  A      
 C   
 xn  C2 n  Cnn  
 1n  d n 

34
5.4 A Inverse, solving for P

 P1  1   2  c 2    co 
 P   c   c      
 2  1 2 2 1  1 c1    o 
 co  2  c 2  o
P1 
c1 2  c2 1
c0 1  c1 0
P2 
c1 2  c2 1
35
 Cramer’s rule
 I0  1  1
I 0  a  bT0
AY  a  bT0 1 0   I 0  a  bT0
AY
Y 
*

A 1  (b  g )
 0 0 1 

1 I0  1
bI  1  g a  bT0 
AC    b a  bT0 0   bI 0  1  g a  bT0  C *  C  0
A
A 1  (b  g )
 g 0 1 

 1 1 I0 
  AG g a  bT0  I 0 
AG    b 1 a  bT0   g a  bT0  I 0  G 
*

A 1  (b  g )
 g 0 0 

36
  I0  1  1
AY  a  bT0 1 0   I 0  a  bT0
 0 0 1 
AY I  a  bT0
Y 
*
 0
A 1  (b  g )
 1 I0  1
AC    b a  bT0 0   bI 0  1  g a  bT0 
 g 0 1 
AC bI 0  1  g a  bT0 
C 
*

A 1  (b  g )
 1 1 I0 
AG    b 1 a  bT0   g a  bT0  I 0 
 g 0 0 
AG g a  bT0  I 0 
G 
*

A 1  (b  g )
37
  I0  1  1
AY  a  bT0 1 0   I 0  a  bT0
 0 0 1 

 1 I0  1
AC    b a  bT0 0   bI 0  1  g a  bT0 
 g 0 1 

 1 1 I0 
AG    b 1 a  bT0   g I 0  a  bT0 
 g 0 0 

38
 Deriving Cramer’s Rule

 n 
  d i Ci1 
 x1  d1 C11  d 2 C21    d n Cn1   x1   in1 
x    x   d C 
  1 d1 C12  d 2 C22    d n Cn 2 
2
  1  i i 2 
2
        i 1
  A      
     A  
d C  d C    d C    
 xn   1 1n 2 2n n nn 
  
 xn   n 
  d i Cin 
 i 1 

39
5.4 Finding the Inverse
aka “the hard way”
 Steps in computing the Inverse Matrix and
solving for x
1. Find the determinant |A| using expansion by
cofactors.
If |A| =0, the inverse does not exist.
2. Use cofactors from step 1 and complete the
cofactor matrix.
3. Transpose the cofactor matrix => adjA
4. Divide adj.A by |A| => A-1
5. Post multiply matrix A-1 by column vector of
constants d to solve for the vector of variables x

40
Derivation of matrix inverse formula

 |A| = ai1ci1 + …. + aincin (scalar)

 Adj. A = transposed cofactor matrix of A

 A(adj.A)=|A|I (expansion by alien cofactors

= 0 for off diagonal elements)

 A(adj.A)/|A| = I

 A-1 = (adj.A)/|A| QED Roberts & Schultz, p. 97-8)

41
5.4 Finding the Inverse
aka “the hard way”
 Steps in computing the Inverse Matrix and
solving for x
1. Find the determinant |A| using expansion by
cofactors.
If |A| =0, the inverse does not exist.
2. Use cofactors from step 1 and complete the
cofactor matrix.
3. Transpose the cofactor matrix => adjA
4. Divide adj.A by |A| => A-1
5. Post multiply matrix A-1 by column vector of
constants d to solve for the vector of variables x

42
 5.4 A Inverse
n
 A(adjA) = |A|I A   a1 j C1 j
j 1
 A(adjA)/|A| = I
( |A| is a scalar)
 A-1A(adjA)/|A|= A-
1I
x  A d  adj A  d
1 1
A
 adjA/|A|= A-1

43
Finding the Determinant
 Y = C+I0+G  1Y – 1C–1G = I0
 C = a + b(Y-T0)  -bY+1C+ 0G = a-bT0
 G = gY  -gY+0C+ 1G = 0

1 1 1
D  b 1 0
g 0 1
 1(1)(1)  1(0)(0)  (1)(1)( b)  (1)( g )(0)  (1)( b)(0)  (1)(  g )(1)
 1 b  g

44
Derivation of matrix inverse formula

 |A| = ai1ci1 + …. + aincin (scalar)

 Adj. A = transposed cofactor matrix of A

 A(adj.A)=|A|I (expansion by alien cofactors

= 0 for off diagonal elements)

 A(adj.A)/|A| = I

 A-1 = (adj.A)/|A| QED Roberts & Schultz, p. 97-8)

45
5.4 Finding the Inverse
aka “the hard way”
 Steps in computing the Inverse Matrix and
solving for x
1. Find the determinant |A| using expansion by
cofactors.
If |A| =0, the inverse does not exist.
2. Use cofactors from step 1 and complete the
cofactor matrix.
3. Transpose the cofactor matrix => adjA
4. Divide adj.A by |A| => A-1
5. Post multiply matrix A-1 by column vector of
constants d to solve for the vector of variables x

46
 5.4 A Inverse
n
 A(adjA) = |A|I A   a1 j C1 j
j 1
 A(adjA)/|A| = I
( |A| is a scalar)
 A-1A(adjA)/|A|= A-
1I
x  A d  adj A  d
1 1
A
 adjA/|A|= A-1

47
 5.4 Inverse, an example
c1 P1  c 2 P2  co  2
C
 1
 c 2 c1 
 1 P1   2 P2   o
 2  c2 
c1 c2   P1    co  adjA  
    P        1 c1 
 1 2  2   o
c1 c2  P1  1  2  c 2    co 
A  c1 2  c2 1 P   c   c    c1    o 
 2  1
1  2 1 2 2 1

48
Finding the Determinant
 Y = C+I0+G  1Y – 1C–1G = I0
 C = a + b(Y-T0)  -bY+1C+ 0G = a-bT0
 G = gY  -gY+0C+ 1G = 0

1 1 1
D  b 1 0
g 0 1
 1(1)(1)  1(0)(0)  (1)(1)( b)  (1)( g )(0)  (1)( b)(0)  (1)(  g )(1)
 1 b  g

49
The macro model

 Y=C+I0+G 1Y - 1C – 1G = I0
 C=a+b*(Y-T0) -bY + 1C + 0G = a-bT0
 G=g*Y -gY + 0C +1G = 0

 1  1  1 Y   I0 
 b 1  
0  C  a  bT 
  0
=

 g 0 1  G   0 

50
 Macro model
 Section 3.5, Exercise 3.5-2 (a-d), p. 47
 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

51
The macro model

 Y=C+I0+G 1Y - 1C – 1G = I0
 C=a+b*(Y-T0) -bY + 1C + 0G = a-bT0
 G=g*Y -gY + 0C +1G = 0

 1  1  1 Y   I0 
 b 1  
0  C  a  bT 
  0
=

 g 0 1  G   0 

52
  1  1  1 Y  1 1 1   I0 
A=  b 1 0  C   1 b 1  g b  a  bT 
    1 b  g   0
 g 0 1  G   g g 1  b  0 
 1  1  1
A    b 1 0   1  b  g 
 g 0 1  I 0  a  bT0
Y
1  b  g 
1 b g 
1 1  g g  bI 0  1  g a  bT0 
C
1  b  g 
C=
 
1 b 1  b
g I 0  a  bT0 
1 1 1  G
C’= b 1  g b  1  b  g 
 
 g g 1  b
53
3.4 Solution of General Eq. System

 (1)(1)-(1)(1) = 0 1 1  x  8
(inconsistent & 1 1  y   9
dependent)     

2 1  x  12 
 (2)(2)-(1)(4) = 0 4 2  y   24
(dependent)     
 (2)(1)-(1)(3) = -1
2 3   x  58
(independent as 1 1   y   20
rewritten)     
     

54
5.7 Leontief Input-Output Models
Structure of an input-output model
The open model, A numerical example
Finding the inverse by approximation, The closed model

x1  a11 x1  a12 x 2   a1n x n  d1

x 2  a 21 x1  a 22 x 2    a 2 n x n  d 2

x n  a n1 x1  a n 2 x 2    a nn x n  d n
 x1 
1  a11   a12   a1n     d1 
   x2   
a 21 1  a22   a2n     d 2 

a  an 2  1  ann    d 3 

 n1  xn
 
 (I -A)x = d ; x = (I -A)-1 d
55
 Miller and Blair 2-3, Table 2-3, p 15 Economic Flows ($ millions)

Sector 1 Sector 2 Final Total output

To (a1jx1) (a2jx2) demand (xi)
(di)
Sector 1 150 500 350 1000
Sector 2 200 100 1700 2000
Factor 650 1400 1100 3150
Payment (Wi)
Total outlays 1000 2000 3150 6150
(Xi)
Sector 1 Sector 2 Final Total output
To (aij) (aij) demand (xi)
(di)
Sector 1 0.15 0.25 350 1000
Sector 2 0.20 0.05 1700 2000
Factor 0.65 0.70 1100 3150
Payment (Wi)
Total outlays 1.00 1.00 3150 6150 56
(X )
Leontief Input-output Analysis

A x   d   x 
ij i i i

A x   d   I x 
ij i i i

d   I x   A x 
i i ij i

I x   A x   d 
i ij i i

I  A x   d 
ij i i

x   I  A  d 
*
i ij
1
i
57
.15 .25  x1   d1   x1 
.20       
 .05  x2  d 2   x2 
.15 .25  x1   d1  1 0  x1 
.20      x 


.05  x2  d 2  0 1
 2 
 d1  1 0  x1  .15 .25  x1 
d   0 1  x   .20 .05  x 
 2   2    2 

1 0  x1  .15 .25  x1   d1 
0 1  x   .20 .05  x   d 
  2    2   2 
1  .15  .25   x1   d1 
  .20     
 1  .05  x2  d 2 
1
 x1   .85  .25  d1 
 x     .20 .95  d 
 2    2

 x1  1 .95 .25  350  1000 


 x  .7575 .20 
 2 
  
.85 1700  2000

58
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

59
3.4 Solution of General Eq. System

 (1)(1)-(1)(1) = 0 1 1  x  8
(inconsistent & 1 1  y   9
dependent)     

2 1  x  12 
 (2)(2)-(1)(4) = 0 4 2  y   24
(dependent)     
 (2)(1)-(1)(3) = -1
2 3   x  58
(independent as 1 1   y   20
rewritten)     
     

60
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

61