Matix Algebra & Economic Applications

Matrix Algebra and Applications
Dudley Cooke
Trinity College Dublin
Dudley Cooke (Trinity College Dublin)
1 / 49
EC2040 Topic 2 - Matrices and Matrix Algebra
Reading
1
Chapters 4 and 5 of CW
Chapters 11, 12 and 13 of PR

Plan
Matrices and Matrix Algebra
Transpose, Inverse, and Determinant of a Matrix
Solutions to Systems of Linear Equations
2 / 49
Matrices and System of Equations

A matrix is an array of numbers. Some examples are,

2

2
3
5
2 3
A=
, B = 5 10 , C =
1
7 2
1
1
4
Notation: We shall use a capital letter to denote a matrix and the
corresponding small letter to denote individual elements of a matrix.
The element in the (2, 1) position (2nd row, 1st column)
of A will be

a11 a12
denoted as a21 . So, from above, A =
.
a21 a22
The number of rows and columns in a matrix is also called its order
or dimension. For instance, the matrix A has order 2 2.
3 / 49
Special Types of Matrices

Square matrix which has the same number of rows as columns (order
n n)
Row matrix (order 1 n)
Column matrix (order n 1).
A vector is a matrix having either a single row or a single column.
Two special types of square matrices are the null matrix (all entries
zero) and the identity matrix which has 1 along the diagonal and
zeros everywhere else:
1 0 ... 0
0 1 ... 0
.. .. .. ..
. . . .
0 0 ... 1
A square matrix where the only non-zero entries are on the diagonal is
also called a diagonal matrix.
4 / 49
Matrices in Economics
One example of a matrix in economics is the IS-LM macro model.1
Y = C + I + G
C = a + b (1 t )Y
(resource constraint)
(consumption function)
I = e lR
(investment function)
= kY hR
M
(money demand)
We can write the above
1
b (1 t )
0
k
system in matrix notation as:

1 1 0
Y

1
0
0
C =
0
1
l I
0
0 h
R
G
a
Question: what happens to consumption when we increase the money

supply (expansionary monetary policy).
1 Recall, IS (the first three equations) and LM gives AD, where G
and M
are
government policies.
5 / 49
Arithmetical Operations on Matrices

Addition and Subtraction of matrices is very easy but can be done
only when all the matrices have the same dimension.
Thus, Amn + Bp q is defined only when m = p and n = q.
Example:

4 3
1 2
= A2 2
1 2
5 6
4+1 3+2
1+5 2+6
5 5
8 6
= B2 2
That is, m = p = n = q = 2.

c11
a11 a12
Clearly,
and c12 cannot be added together.
a21 a22
c13
=A
22
=C31
6 / 49
Arithmetical Operations on Matrices

Formal Definition: Suppose that we have two matrices A = [aij ]mn
and B = [bij ]mn .
Then, the matrix A + B is simply [aij + bij ]mn . E.g., for the
m = n = 2 case,

a11 a12
b11 b12
a11 + b11 a12 + b12
+
=
a21 a22
b21 b22
a21 + b21 a22 + b22
=A22
B2 2
Similarly, the matrix A B is simply [aij bij ]mn .

This process easily extends to the case when we have many matrices.
For instance - if we have three matrices A, B, C of the same
dimension - then A + B + C is the matrix formed by adding the
corresponding (i, j )th entries of A, B and C .
7 / 49
Scalar Multiplication
Scalar Multiplication by a number c is just multiplying each element
of the matrix by the number c.
2 1
3 9
For instance if A =
4 5 and c = 5/2 then c A is the
2 2
5
5/2
15/2 45/2
matrix
10 25/2 .
5
5
Note that scalar multiplication applies to any matrix. We can
combine the operations of scalar multiplication and addition: for
instance, you should be able to say what 5A + 3B means if A and B
have the same dimension.
8 / 49
Matrix Multiplication
Matrix Multiplication is somewhat more complicated (but all it really

requires is concentration).
Suppose that we have two matrices Amn and Bp q .
The product AB is defined only when n = p, that is when the number
of columns in A equals the number of rows in B.
1
This means that the product BA is defined only when q = m.
It is possible that AB is defined but BA is not defined.
Furthermore, even if AB and BA are both defined it is possible that

they do not give the same matrix.
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Matrix Multiplication
The bottom line is, the order of operation is important in matrix

multiplication.
Mathematically, we say that matrix multiplication is not commutative
(whereas the scalar case is).
All this is very different from ordinary multiplication.
Take the previous example:

4 3
1 2
A22 =
and B22 =
1 2
5 6
What are AB and BA?
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Matrix Multiplication for the 2 by 2 case

First, AB is,

4 3
1 2
4 (1) + 3 (5) 4 (2) + 3 (6)

1 (1) + 2 (5) 1 (2) + 2 (6)
AB =

1 2
5 6

19 17
11 14
However, BA is,

4 3
1 2
BA =
5 6
1 2

1 (4) + 2 (1) 1 (3) + 2 (2)
6 7
=
=
5 (4) + 6 (1) 5 (3) + 6 (2)
26 27
So, AB is not BA.
Again, think about this versus the scalar case. If a = 5 and b = 6,
ab = ba = 30.
11 / 49
Formal Definition of Matrix Multiplication

Suppose we have two matrices A = [aij ]mn and B = [bij ]np .
The product AB is a m p matrix [cij ]mp where,
cij = ai1 b1j + ai2 b2j + . . . + ain bnj .
Loosely speaking, cij is the product of the ith row of A and the jth
column of B.
Again, for the 2

AB =

=

=
by 2 case, we have:

a11 a12
b11 b12
a21 a22
b21 b22
a11 (b11 ) + a12 (b21 ) a11 (b11 ) + a12 (b21 )
a21 (b12 ) + a22 (b22 ) a21 (b12 ) + a22 (b22 )

c11 c12
C
c21 c22
12 / 49
Example

1 2
7
8
Suppose A = 3 4 and B =
and AB = C , if
9 10
5 6
possible.
Since A has order 3 2 and B has order 2 2, it follows that
C = AB is defined and the product is a matrix of dimension 3 2.
The individual elements of C (e.g., c11 = a11 b11 + a12 b21 ) are:
c11 = (1 7) + (2 9) = 25, c12 = (1 8) + (2 10) = 28,
c21 = (3 7) + (4 9) = 57, c22 = (3 8) + (4 10) = 64,
c31 = (5 7) + (6 9) = 89, c32 = 5 8 + 6 10 = 100.
c11 c12
25 28
Hence, C = c21 c22 = 57 64 .
c31 c32
89 100
Note that BA is not defined as elements a31 = 5 and a32 = 6 cannot
be matched with elements of B.
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Null and Identity Matrix Multiplication

The null and identity matrix cases are trivial.
The identity matrix plays the role of 1 in the scalar case.
Scalar case:
31 = 3
Matrix case:

4 3
1 0
4 (1) + 3 (0) 4 (0) + 3 (1)
4 3
=
=
1 2
0 1
1 (1) + 2 (0) 1 (0) + 2 (1)
1 2
The null matrix plays the role of zero. As with 3 0 = 0, so,

4 3
0 0
4 (0) + 3 (0) 4 (0) + 3 (0)
0 0
=
=
1 2
0 0
1 (0) + 2 (0) 1 (0) + 2 (0)
0 0
14 / 49
Recap: Rules for Scalars versus Matrices

Scalar cases:
1
Commutative; a + b = b + a
Associative; (a + b ) + c = a + (b + c ) and (ab ) c = a (bc )
Distributive; a (b + c ) = ab + ac and (b + c ) a = ba + ca
Matrix cases:
Addition
Commutative law; A + B = B + A
Associative law; (A + B ) + C = A + (B + C )
Multiplication
Associative law; (AB ) C = A (BC )
Distributive law; A (B + C ) = AB + AC and (B + C ) A = BA + CA
15 / 49
Transpose of a Matrix
The transpose of a matrix A is formed by interchanging the rows and

columns of A.
If A has order m n, then its transpose has dimension n m.
The transpose of A is generally denoted as AT and sometimes A0 .
If A = AT , then we say that A is a symmetric matrix.
A symmetric

1
3
matrix must be a square matrix (e.g., A = AT =
).
3 1
Transpose of a square matrix:

a11 a12
a11 a21
T
A=
A =
a21 a22
a12 a22
16 / 49
Properties of the Transpose
The transpose operation has the following properties.

1
(AT )T = A
(A + B )T
AT
+ BT .
4 3
1 2
AT
=
Suppose A =
=

1 2
1 5
and B =
BT =
. Try this at home.
5 6
2 6
4 1
3 2
(AB )T = B T AT
More generally, if we have n-matrices A1 , A2 , . . . , An then
T
T T
(A1 A2 . . . An )T = AT
n An1 . . . A2 A1
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The Inverse of a Square Matrix
For a square matrix, Ann , the following is always true:

AIn = In A = A
If we can find a matrix Bnn satisfying AB = BA = In , then we say
that B is the inverse matrix of A. The inverse matrix of A is denoted
A1 .
Not all square matrices have inverses.
1
A matrix which has an inverse is called non-singular.
A matrix which does not have an inverse is called singular.
18 / 49
The Determinant of a Square Matrix

We denote the determinant of A, as |A|.
The determinant of a 1 1 matrix is trivial: it is the number itself.

a11 a12
The determinant of a 2 2 matrix A =
is,
a21 a22
|A| = a11 a22 a12 a21

The procedure for bigger matrices is more complicated. Let A be a
n n matrix. Let Mij denote the determinant of the matrix derived
from A by deleting the ith row and jth column. Let Cij = (1)i +j Mij .
We refer to Mij as a minor and Cij as a co-factor.
Note: A square matrix A has an inverse if and only if its determinant
is non-zero (is non-singular).
19 / 49
The Determinant of a Square matrix
Pick any row or column in the matrix. Suppose we pick the ith row.
Then, the determinant of the matrix A is:
|A| = ai1 Ci1 + ai2 Ci2 + . . . + ain Cin

If we pick the a column, say the jth one, then the determinant is
computed as:
|A| = a1j C1j + a2j C2j + . . . + anj Cnj

Observe that we could have picked any row or column: we will always
get the same answer. For practical considerations, we try to pick out
a row or column which has the maximum number of zeros.
20 / 49
The Determinant of a Square matrix, 2 by 2 case

Suppose we have the following matrix: A =
1 2
3 4

. We know
|A| = (1 4) (2 3) = 2.
Although its a little trivial, we can relate that to the technique for
larger matrices, as a first step.
We have,
|A| = (a11 C11 ) + (a12 C12 )

= a11 (1)1+1 M11 + a12 (1)1+2 M12
= a11 M11 a12 M12 ; M11 = 4 and M12 = 3
= a11 4 a12 3 = (1 4) (2 3) = 2
Why is this all so easy? In the 2 by 2 case, the Mij s are scalars. If
we have a 3 by 3 case, the Mij are 2 by 2 matrices, which we have to
work out the determinant of first etc...
21 / 49
3 by 3 Example
1 2 3
Suppose we have the following 3 by 3 matrix, A = 4 2 6 .
7 8 9
Let us compute the determinant by computing the co-factors of the
first row.
We have, Cij = (1)i +j Mij , so,
C11 = (1)
1+1
M11 = (1)

2 6

8 9
| {z }
1+1
M11
But we know that M11 = (8 6) (2 9) = 48 18 = 30.

We conclude that C11 = 30.
22 / 49
3 by 3 Example Continued
We can do this for the other 2 elements of the row. We find,

1+2 4 6
=6
C12 = (1)
7 9
| {z }
=M12
C13

1+3 4 2
= (1)
7 8

= 18

Hence, the determinant, call it for short, is,

= a11 C11 + a12 C12 + a13 C13 = a11 M11 a21 M21 + a13 M13
= [1 (30)] + (2 6) + (3 18) = 36
We could have chosen any other row or column. If we choose the
third column, then we have: C13 = 18, C23 = 6, C33 = 6 and
therefore = (3 18) + (6 6) + [9 (6)] = 36.
23 / 49
Properties of the Determinant
There are some useful properties of determinants (that we wont

prove) which can simplify the computation of the determinant
significantly.
1
If a row or column of A is multiplied by c, then the determinant of

the new matrix is c |A|.
Multiplying a row (column) by a non-zero constant and adding it to

another row (column) has no effect on the determinant.
24 / 49
Extended Example with Common Factors

Common factors basically involves taking things outside the brackets,
as we usually do, except we can use the properties of the determinant.
1 2 3
Consider the same matrix as before, A = 4 2 6 .
7 8 9
Note
row can
that the second

be written as
2 2 1 3 = 4 2 6 .
We know that multiplying a row by a constant leads the determinant
to change by the same factor.
It follows,

1 2 3

|A| = 2 2 1 3
7 8 9
25 / 49
Example Continued
Note
that
column
three also has
1
3
3 1 = 3 .
3
9
It follows that,

1

|A| = (2 3) 2
7
a common factor of 3, i.e.,

1 2 1
2 1

1 1 = 6 2 1 1
7 8 3
8 3
There are now no common factors; however we can now make use of
the row and column operations.
26 / 49
Example Continued
Since the determinant is not changed by multiplying a row (column)
by a constant and adding it to another row (column) we can use this
to make some entries in a row or column zeros.
Multiplying the first row by 1 and adding it to the second gives,

1 2 1

|A| = 6 1 1 0
7 8 3

1 2 1

What did we do? Well, we started with 6 2 1 1 and we noted,
7 8 3
T T
T
1
2
1
+ 1
= 1 , which is the new middle row
(1) 2
1
1
0
of |A|.
27 / 49
Example Continued
Similarly, multiplying the first row by 3
row gives:

1 2

|A| = 6 1 1
4 2
and adding it to the third

1
0
0
Following
the same idea
as before, we start out with
1 2 1

|A| = 6 1 1 0 and we note,
7 8 3
T T
T
1
7
4
+ 8
= 2 , which is the new bottom row of
(3) 2
1
3
0
|A|.
28 / 49
Example Continued

1 2 3

Why did we do all of this? Well, |A| = 4 2 6 is not that easy
7 8 9
to compute.

1 2 1

However, |A| = 6 1 1 0 is easy to compute, as we can take
4 2 0
the cofactors of the third column.
In that case, we only have to compute one cofactor since two entries
in the column are zero.
Therefore, we have,

|A| = 6 1 (1)
1+3

1 1

4 2 = 6 6 = 36
29 / 49
Computing the inverse using the determinant

We observed before that we can find the inverse of a square matrix A
if and only if |A| 6= 0.
When the determinant exists, it can be shown that the inverse is
given by,
1
[cij ]T
A1 =
|A|
where [cij ] is the matrix of cofactors of A.
In words, what we do is the following:
1
Replace each element of A by its cofactor.
Take the transpose of the matrix.
Scalar multiply this matrix by 1/|A|.

Note: the following is also used, adj (A) [cij ]T ; it is called the
adjunct.
30 / 49
A 2 by 2 Example of Matrix Inversion

Consider the following 2 by 2 matrix A =
3 2
1 0

.
We know that |A| = (3 0) (1 2) = 2. Since |A| 6= 0, an

inverse must exist.
The cofactor matrix (notice how
easy it is in this case, again due to
0 1
0 2
zeros) is the following; cij =
[cij ]T =
1 3
2 3

0 1
0 2
Then, A1 = |A1 | [cij ]T = 21
= 21 1
.
3
1 3
2 2
31 / 49
The Inverse of a Square Matrix

Consider the following 2 by 2 matrix: A =
1
3 4

. Does this
matrix have an inverse?

We know an inverse only exists if the matrix is non-singular. For this
to hold, we require, |A| 6= 0.
We know that if |A| = (1 4) (3 ) = 0 the matrix is singular.
That is, we cant find the inverse of A if = 4/3.
Finding a singularity tends to become a problem is we have very big
matrices (say we have a big model) which is relatively sparse (that is,
has lots of zeros in it).
32 / 49
3 by 3 Example
Let us
compute the
inverse of the matrix that we have seen before:
1 2 3
A = 4 2 6 .
7 8 9
We already know the following:
C11 = 30, C12 = 6, C13 = 18, C23 = 6, C33 = 6
|A| = 36
Recall we can use C1j s or Ci3 s to get here.
The remaining cofactors are C21 = 6, C22 = 12, C31 = 6, C32 = 6.
Try this at home.
33 / 49
Matrix Inversion Example Continued
30
6
18
12 6 .
Here the matrix of cofactors is, [cij ] = 6
6
6
6
30
6
6
12 6 .
The transpose is, [cij ]T = 6
18
6
6
5
1
1
6
6
6
1
The inverse matrix is, A1 = |A1 | [cij ]T = 16 13
as
6
1
1
1
2
6 6
|A| = 36.
34 / 49
Cramers Rule
Now suppose we have a big linear model.
In its most general specification it is written as a system of linear
equations:
a11 x1 + a12 x2 + . . . + a1n xn = b1
..
..
..
..
.
.
.
.
.
= ..
an1 x1 + an2 x2 + . . . + ann xn = bn
This is system of n linear equations in n unknowns. It can be
represented
compactlyin matrix
asAx =b where,
notation
a11 . . . a1n
x1
b1
..
.
.
.
..
.. , x = .. , b = ...
A= .
.
an1 . . . ann
xn
bn
35 / 49
Cramers Rule
We note that providing |A| 6= 0 (that is, A has an inverse) we can
solve for x by just multiplying both sides of the equation Ax = b by
A1 :
(A1 )Ax = (A1 A)x = In x = x = A1 b
Cramers rule is just an alternative formula for this; the advantage of
the rule is that we can find each xi individually; this may be useful if
we dont want to find the value of all xi .
Cramers Rule states that:
xi =
|Ab,i |
|A|
Here Ab,i is the matrix where the ith column of A is replaced by the
column vector b.
36 / 49
Examples of solving for a specific variable

2 3 7
w
6
y
Consider the system 4 4 4
= 2 . Here, |A| = 80;
1 5 1
z
1
A
hence the system is solvable.

We can compute w independently

6 3 7

2 4 4

1 5 1
w=
|A|
of y and z as,

48
3
= =
80
5
Computation of y and z is left as an exercise.
37 / 49
Why does Cramers Rule work?
Cramers Rule is equivalent to finding the inverse of A. To see this

more
formally, consider
the
system,
a11 a12 a13

w
b1
a21 a22 a33 y = b2 .
a31 a32 a33
z
b3
Now note that the inverse of A can be written as,
C11 C21 C31

1
C12 C22 C32
A1 =
|A|
C13 C23 C33
where Cij is the co-factor of aij .
38 / 49
Why does Cramers Rule work?

Hence, we have,
w
b1 C11 + b2 C21 + b3 C31
y = A1 b = 1 b1 C12 + b2 C22 + b3 C32
|A|
z
b1 C13 + b2 C23 + b3 C33
Now note that b1 C11 + b2 C21 + b3 C31 is nothing but the determinant
of the matrix where the first column of A has been replaced by the
vector b.
Similarly, b1 C12 + b2 C22 + b3 C32 is the determinant of the matrix
where the second column of A has been replaced by the vector b.
You can check that a similar observation holds for
b1 C13 + b2 C23 + b3 C33 . This shows that the inverse approach and
Cramers rule are identical for a system of three linear equations but
this approach can be easily extended.
39 / 49
A Demand and Supply Example

Consider a linear model of demand and supply (of ice-creams).
1
Demand for ice-creams depends on the price of ice-creams, the

income of individuals and the temperature.
The supply of ice-creams also depends on how much the ice-cream

company can charge for its product and how hot it is.
qd = M bp + T
qs = p eT + d
If income goes up, demand goes up. If the temperature goes up,
demand goes up but supply goes down (some of the ice-cream melts
before it is sold). If price goes up, demand falls and supply rises. In
equilibrium, qd = qs .
40 / 49
A Demand and Supply Example

It is very easy to solve this model. The solution for the price is,
M +(+e)T d
. Higher temperatures result in higher prices as
p =
+b
people eat more ice-creams and ice-creams melt, reducing supply.
We can also draw the model in (p, q ) space and shift the curves.
More importantly, we can also represent the model in matrix form.

b 1
p
M + T
=
1
q
d eT
A
Now we need |A| = b + 6= 0. If we look at p , that makes a lot of

economic sense. We cant have an infinite price for ice-cream.
Again, we can also use Cramers rule to solve for shocks to income or
temperature.
41 / 49
Demand and Supply

The supply and demand example is trivial. However, we might
imagine that the entire economy (not just one market) consists of
many demand and supply schedules (what we called a big linear
model).
The demand and supply schedules will probably display some form of
interdependence. That is, consider an economy with ice-creams and
apples. If the temperature goes up, the demand for apples might
drop. Why? Because, with given income, the demand for ice-cream
rises.
If this is the case, our economy consists of an entire vector of prices
and a vector of quantities. We want to know the price and quantities
in equilibrium.
That turns out to be very complicated. Having a grasp of matrix
algebra is then very useful as we want to know if an equilibrium exists.
42 / 49
Returning to the example at the very beginning

Consider the macroeconomic model we wrote down at the beginning.
C = a + b (1 t )Y
I = e lr
G = G
L = kY hR
M=M
We want to solve this model to determine the endogenous variables
(Y , C , I , R ) in terms of the exogenous variables
).
(G , a, b, t, e, k, h, l, M
We can use all the new tools we have developed to solve the model.
Well focus on solving for consumption as a function of monetary and
fiscal policy.
43 / 49
Macro Model Example

The equilibrium in this system is determined by the conditions:
Y = C + I + G
C = a + b (1 t )Y
I = e lR
= kY hR
M
We can write the above
1
b (1 t )
0
k
system in matrix notation as:

1 1 0
Y

1
0
0
C =
0
1
l
I
0
0 h
R
G
a
The first thing to do is to compute |A| which is needed no matter

which approach we use to solve this system. We choose one of the
rows or columns with the maximum number of zeros since that will
simplify the computation.
44 / 49
Example Continued
Suppose we choose row 2. We know, = 4j =1 a2j C2j .

Then, = b (1 t )C21 + C22 , as a22 = 1 and a23 = a24 = 0.
| {z }
=a21
(1)i +j M
4
2+j M . However, it is
Also Cij =
ij so = j =1 a2j (1)
2j
not as easy as before because the M2j s are 3 by 3 matrices.
We only have two of them, in this case.

1 1 0
1 1 0

2+1
2
+
2
0 1
1
l
l
C21 = (1)
C22 = (1)
0

0

0 h
k 0 h
45 / 49
Example Continued
Expanding the 3 3 determinant in the expression for C21 about the
first column (two zero elements), we get,
C21 = [(1)(1 (h ) 0 l )] = h
For C22 we can expand the 3 3 determinant about the first column
(one zero element):

1 l
1 0
1+1
3
+
1
+ (1)

C22 = (1)
1
k
0 h
1 l
= h kl
Hence the determinant of the original 4 4 is,
= bh (1 t ) h kl = h (1 b (1 t )) kl
46 / 49
Example Continued
We can now compute the value of any of the endogenous variables
using Cramers Rule. Suppose we want to compute C . We replace

T . Then,
the second column with G a e M

1
G 1 0

1 b (1 t ) a
0
0
C =

0
e
1
l
|A|

k
M
0 h
Computing the determinant of the
the second row, we have

2+1
= b (1 t ) (1)

1 1 0

l
0 1
k 0 h
4 4 matrix by expanding around

G
e
1 0
1
l
0 h

+ a (1)2+2

47 / 49
Example Continued
The second 3 3 determinant above has already been found.
Expanding this about the first 3 3 around the first row, we have,

G 1 0

e
1
l = G (1)2 [1 (h ) 0 l ] + (1)

M
0 h
l]
(1)3 [e (h) M
).
This is (hG + he + Ml
) + a (h + kl ) =
Hence, = b (1 t ) (hG + he + Ml
[b (1 t )(hG + he + Ml ) + a(h + kl )]. It follows that

C =
) + a(h + kl )
b (1 t )(hG + he + Ml
h (1 b (1 t )) + kl
are policy variables.

This is all exogenous; and G , M
48 / 49
Roundup
You should now be able to do the following:

1
Add/subtract/multiply matrices.
Find the inverse of a matrix and its determinant (which is basically

matrix manipulation).
Apply these techniques to standard models and use Cramers rule to

solve for endogenous variables as functions of exogenous variables.
49 / 49

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Matrix Algebra and Applications

Dudley Cooke (Trinity College Dublin)

Matrix Algebra and Applications

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Dudley Cooke (Trinity College Dublin)

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Dudley Cooke (Trinity College Dublin)

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Dudley Cooke (Trinity College Dublin)

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Dudley Cooke (Trinity College Dublin)

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Dudley Cooke (Trinity College Dublin)

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|A| = a11 a22 a12 a21

Matix Algebra & Economic Applications

Matix Algebra & Economic Applications