Pierre N.V.

Tu

Dynamical Systems
An Introduction with Applications
in Economics and Biology

Second Revised
and Enlarged Edition

With 105 Figures

Springer-Verlag
Berlin Heidelberg N ew York
London Paris Tokyo
Hong Kong Barcelona
Budapest
Professor Dr. Pierre N. V. Tu
Department of Economics
The University of Calgary
2500 University Drive N.W.
Calgary, Alberta T2N IN4
Canada

ISBN-13: 978-3-540-57661-7 e-ISBN-13: 978-3-642-78793-5

DOl: 10.1007/978-3-642-78793-5

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Preface to the Second Edition

The favourable reception of the first edition and the encouragement received
from many readers have prompted the author to bring out this new edition. This
provides the opportunity for correcting a number of errors, typographical and others,
contained in the first edition and making further improvements.
This second edition has a new chapter on simplifying Dynamical Systems
covering Poincare map, Floquet theory, Centre Manifold Theorems, normal forms
of dynamical systems, elimination of passive coordinates and Liapunov-Schmidt
reduction theory. It would provide a gradual transition to the study of Bifurcation,
Chaos and Catastrophe in Chapter 10. Apart from this, most others - in fact all
except the first three and last chapters - have been revised and enlarged to bring
in some new materials, elaborate some others, especially those sections which many
readers felt were rather too concise in the first edition, by providing more explana-
tion, examples and applications. Chapter 11 provides some good examples of this.
Another example may be found in Chapter 4 where the review of Linear Algebra has
been enlarged to incorporate further materials needed in this edition, for example
the last section on idempotent matrices and projection would prove very useful to
follow Liapunov-Schmidt reduction theory presented in Chapter 9.
The purpose of this book is to equip students with the essential tools needed
for understanding the literature and doing research in the field of dynamic analysis,
not to teach economic or biological theory in various areas. Examples, illustrations
and applications have consequently been chosen among the simplest and best knmvn
ones, in order not to divert students' effort to increasingly sophisticated economic
and biological theory, and away from the main objective of acquiring the tools needed
for theory.
Students can start from anywhere depending on their background and interest.
The first six chapters could provide materials for the first half course: in fact, these
cover about half of Economics 304, and the remaining chapters are basically the
lecture materials for Economic 505, a half course in Dynamic Economics at the
University of Calgary.
In the preparation of this second edition, I have benefited from many readers'
feedback, comments and suggestions, for which I am thankful. J. Longworth deserves
highest commendation for her amazing skill and exemplary patience in correcting,
editing, typing and retyping the book. Last but not least, I am grateful to my wife
Elise, for her continuous encouragement and active participation in proof-reading
and diagram drawing. The remaining errors are, of course, my sole responsibility.

Pierre N.V. Tu
The University of Calgary
February 1994
Preface to the First Edition

Dynamic tools of analysis and modelling are increasingly used in Economics

and Biology and have become more and more sophisticated in recent years, to the
point where the general students without training in Dynamic Systems (DS) would
be at a loss. No doubt they are referred to the original sources of mathematical
theorems used in the various proofs, but the level of mathematics is generally beyond
them. Students are thus left with the burden of somehow understanding advanced
mathematics by themselves, with very little help.
It is to these general students, equipped only with a modest background of
Calculus and Matrix Algebra that this book is dedicated. It aims at providing them
with a fairly comprehensive box of dynamical tools they are expected to have at
their disposal. The first three Chapters start with the most elementary notions of
first and second order Differential and Difference Equations. For these, no matrix
theory and hardly any calculus are needed. Then, before embarking on linear and
nonlinear DS, a review of some Linear Algebra in Chapter 4 provides the bulk of
matrix theory required for the study of later Chapters. Systems of Linear Differ-
ential Equations (Ch. 5) and Difference Equations (Ch. 6) then follow to provide
students with a good background in linear DS, necessary for the subsequent study
of nonlinear systems. Linear Algebra, reviewed in Ch. 4, is used freely in these and
subsequent chapters to save space and time. Chapter 7 discusses nonlinear DS, the
linearisation theory, the existence and uniqueness of Limit Cycles, followed by
Chapter 8 where some special DS such as the Gradient Systems, Lagrangean
Systems and Hamiltonian Systems are discussed with some applications. Chapter
9 introduces, at an elementary level, some more advanced materials which increas-
ingly enter the Economics and Biology literature in recent years, namely Bifurcation
Theory, Chaos and Catastrophe Theory. Chapter 10 deals with Optimal DS by
showing how Pontryagin's Maximum Principle can be derived from the classical
Calculus of Variations and how it is applied in various areas. Optimal Control
Theory is now commonplace in Economics and Biology, as will be seen in Chapter
11, and students are expected to be familiar with it. Finally, although applications
are provided in each chapter, mainly as illustrations of the various dynamic tools
under examination, Chapter 11 is devoted more systematically to selective
applications in Economics, Ecology and Bioeconomics.
The materials covered are at the various levels of difficulty. Emphasis, however, is
placed on a clear and non-technical presentation of the various technical concepts and
their applications, rather than on theoretical formalism. This is achieved so~etimes
at the expense of rigour. Where proofs are beyond the level of this book, references
are given and a plain explanation of the various points of the theorems is always
provided and the ways they are used or can be used are always indicated.
This is not an easy book to write, since it is self-contained, aiming at taking
students from the first steps, with hardly any mathematical prerequisites, to
advanced areas such as bifurcation, chaos and catastrophe theory.
viii

Students can start from anywhere. Those who only need to know scalar differen-
tial and difference equations will find the first three chapters adequate and stop after
them. Those who do not need these elementary reviews can skip the first three or
four chapters. Those who are familiar with linear DS can skip the first six chapters
and start at Chapter 7.
Finally, only deterministic DS are studied in this book. Stochastic DS,
although increasingly used, is a field in itself and would require a separate book.
In the preparation of this book, I have benefitted from discussion with several
colleagues. Ngo Van Long in particular should be thanked for his patience in reading
the first draft and his encouraging comments. The students on which this book was
tested have all made their contribution, by their enthusiastic response and their
searching questions, to the improvement of the clarity and quality of my exposition.
Joanne Longworth deserves more than a casual commendation for her typing and
computing skill and her patience in dealing with several corrections. Last but not
least, I must here record my appreciation to Elise, my wife, for her encouragement
and especially for her active participation in the proof reading and diagrams drawing.
Needless to say that I alone am responsible for any remaining errors.

Pierre N.V. Th
The University of Calgary
January 1992
Contents

Preface v

1 Introduction 1

2 Review of Ordinary Differential Equations 5

2.1 First Order Linear Differential Equations. . . . . . . . . . . . . . .. 6
2.1.1 First Order Constant Coefficient Linear Differential Equations 7
2.1.2 Variable Coefficient First Order Linear Differential Equations 9
2.1.3 Equations Reducible to Linear Differential Equations 11
2.1.4 Qualitative Solution: Phase Diagrams. 12
2.1.5 Some Economic Applications . , . 14
1. Walrasian Tatonnement Process . . 14
2. The Keynesian Model . . . . . . . . 15
3. Harrod Domar's Economic Growth Model 16
4. Domar's Debt Model (1944) . . . . . . . . 17
5. Profit and Investment . . . . . . . . . . . 17
6. The Neo-Classical Model of Economic Growth. 18
2.2 Second and Higher Order Linear Differential Equations . 19
2.2.1 Particular Integral (xp or xe) where d(t) = d Constants 24
2.2.2 Particular Integral (x p ) when d = g(t) is some Function of t 25
1. The Undetermined Coefficients Method 25
2. Inverse Operator Method . . . . . . . . . . . . . . . . .. 26
3. Laplace Transform Method . . . . . . . . . . . . . . . .. 29
2.3 Higher Order Linear Differential Equations with Constant Coefficients 31
2.4 Stability Conditions. . . . . . . . . . . . . . 33
2.5 Some Economic Applications. . . . . . . . . . . . . . . 34
1. The IS-LM Model of the Economy . . . . . . 34
2. A Continuous Multiplier-Acceleration Model 35
3. Stabilization Policies . . . . . . 35
4. Equilibrium Models with Stock 37
2.6 Conclusion................. 38

3 Review of Difference Equations 39

3.1 Introduction . . . . . . . . . . . 39
3.2 First Order Difference Equations . 40
3.2.1 Linear Difference Equations 40
x

3.2.2 Non-linear Difference Equations and Phase Diagram. 42

3.2.3 Some Economic Applications .. 43
1. The Cobweb Cycle . . . . . . . . . . 43
2. The Dynamic Multiplier Model . . . 44
3. The Overlapping Generations Model 44
3.3 Second Order Linear Difference Equations 46
3.3.1 Particular Integral . . . . . . . . . . 46
3.3.2 The Complementary Functions xc(t) 47
3.3.3 Complete Solution and Examples 49
3.4 Higher Order Difference Equations . . . . . 51
3.5 Stability Conditions. . . . . . . . . . . . . . 51
3.5.1 Stability of First Order Difference Equations. 52
3.5.2 Stability of Second Order Difference Equations. 52
3.5.3 Stability of Higher Order Difference Equations . 53
3.6 Economic Applications . . . . . . . . . . . . . . . . . . 54
3.6.1 Samuelson's (1939) Business Cycle . . . . . . . 54
3.6.2 Hick's (1950) Contribution to the Theory of Trade Cycle 55
3.7 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . 57

4 Review of Some Linear Algebra 59

4.1 Vector and Vector Spaces .. 59
4.1.1 Vector Spaces . . . . . . 60
4.1.2 Inner Product Space .. 61
4.1.3 Null Space and Range, Rank and Kernel 62
4.2 Matrices............ 63
4.2.1 Some Special Matrices 63
4.2.2 Matrix Operations . . 64
4.3 Determinant Functions . . . . 65
4.3.1 Properties of Determinants. 65
4.3.2 Computations of Determinants 66
4.4 Matrix Inversion and Applications. 68
4.5 Eigenvalues and Eigenvectors .. 69
4.5.1 Similar Matrices . . . . . 72
4.5.2 Real Symmetric Matrices. 73
4.6 Quadratic Forms . . . . . . 74
4.7 Diagonalization of Matrices .. . 76
4.7.1 Real Eigenvalues . . . . . 76
4.7.2 Complex Eigenvalues and Eigenvectors. 78
4.8 Jordan Canonical Form . . . . . . . . 79
4.9 Idempotent Matrices and Projection 81
4.10 Conclusion . . . . . . . . . . . . . . . 82
 xi

5 First Order Differential Equations Systems 83

5.1 Introduction.............................. 83
5.2 Constant Coefficient Linear Differential Equation (ODE) Systems 83
5.2.1 Case (i). Real and Distinct Eigenvalues. 84
5.2.2 Case (ii). Repeated Eigenvalues. 87
5.2.3 Case (iii). Complex Eigenvalues. . 88
5.3 Jordan Canonical Form of ODE Systems. 89
Case (i) Real Distinct Eigenvalues . 90
Case (ii) Multiple Eigenvalues . . 91
Case (iii) Complex Eigenvalues. . 93
5.4 Alternative Methods for Solving x = Ax 95
5.4.1 Sylvester's Method . . . . . . . . 95
5.4.2 Putzer's Methods (Putzer 1966) . 96
5.4.3 A Direct Method of Solving x = Ax . 97
5.5 Reduction to First Order of ODE Systems 98
5.6 Fundamental Matrix . . . . . . . . . 98
5.7 Stability Conditions of ODE Systems .. . · 100
5.7.1 Asymptotic Stability . . . . . . . . .100
5.7.2 Global Stability: Liapunov's Second Method · 101
5.8 Qualitative Solution: Phase Portrait Diagrams. · 102
5.9 Some Economic Applications . . . . . . . . . . · 107
5.9.1 Dynamic IS-LM Keynesian Model .. . .107
5.9.2 Dynamic Leontief Input-Output Model · 109
5.9.3 Multimarket Equilibrium . . . . . . . . · 111
5.9.4 Walras-Cassel-Leontief General Equilibrium Model · 112

6 First Order Difference Equations Systems 115

6.1 First Order Linear Systems . . . . . . . . .115
6.2 Jordan Canonical Form . . . . . . . . . . . · 117
Case (i). Real Distinct Eigenvalues .118
Case (ii). Multiple Eigenvalues. .119
Case (iii). Complex Eigenvalues · 120
6.3 Reduction to First Order Systems. · 121
6.4 Stability Conditions .. . · 123
6.4.1 Local Stability . . . . . . . · 123
6.4.2 Global Stability . . . . . . . .125
6.5 Qualitative Solutions: Phase Diagrams .126
6.6 Some Economic Applications. . . . . . · 128
1. A Multisectoral Multiplier-Accelerator Model · 128
2. Capital Stock Adjustment Model .129
3. Distributed Lags Model . . . . .129
4. Dynamic Input-Output Model . · 130
xii

7 Nonlinear Systems 133

7.1 Introduction........................ . 133
7.2 Linearization Theory . . . . . . . . . . . . . . . . . . . . 134
7.2.1 Linearization of Dynamic Systems in the Plane . 136
7.2.2 Linearization Theory in Three Dimensions . . 144
7.2.3 Linearization Theory in Higher Dimensions. . 145
7.3 Qualitative Solution: Phase Diagrams. . . . . . . . . 147
7.4 Limit Cycles. . . . . . . . . . . . .. . . . . . . . . . 149
Economic Application I: Kaldor's Trade Cycle Model . 152
7.5 The Lienard-Van der Pol Equations
and the Uniqueness of Limit Cycles . . . . . . . . 154
Economic Application II: Kaldor's Model
as a Lienard Equation . . 156
7.6 Linear and Nonlinear Maps .. . 157
7.7 Stability of Dynamical Systems . 159
7.7.1 Asymptotic Stability . 159
7.7.2 Structural Stability. . 160
7.8 Conclusion . . . . . . . . . . . 161

8 Gradient Systems, Lagrangean and Hamiltonian Systems 163

8.1 Introduction . . . . . . . "........ . 163
8.2 The Gradient Dynamic Systems (GDS) . 163
8.3 Lagrangean and Hamiltonian Systems. . 167
8.4 Hamiltonian Dynamics . . . . . . . . . . 170
8.4.1 Conservative Hamiltonian Dynamic Systems (CHDS) . 171
8.4.2 Perturbed Hamiltonian Dynamic Systems (PHDS) . . . 174
8.5 Economic Applications . . . . . . . . . . . . . . . . . . . . . " 176
8.5.1 Hamiltonian Dynamic Systems (HDS) in Economics. . 176
8.5.2 Gradient (GDS) vs Hamiltonian (HDS) Systems in Economics 177
8.5.3 Economic Applications: Two-State-Variables Optimal
Economic Control Models . 178
8.6 Conclusion. , . . . . . . . . . . . 181

9 Simplifying Dynamical Systems 183

9.1 Introduction.. . 183
9.2 Poincare Map . . . . . . . . . . " 183
9.3 Floquet Theory . . . . . . . . . . 185
9.4 Centre Manifold Theorem (CMT) . 187
9.5 Normal Forms . . . . . . . . . . . . 191
9.6 Elimination of Passive Coordinates . 192
9.7 Liapunov-Schmidt Reduction . . . . 193
9.8 Economic Applications and Conclusions . 194

10 Bifurcation, Chaos and Catastrophes in Dynamical Systems 195

10.1 Introduction. . . . . . . . 195
10.2 Bifurcation Theory (BT) . . . . . . . . . . . . . . . . . . . . .. . 195
 xiii

10.2.1 One Dimensional Bifurcations · 197

10.2.2 Hopf Bifurcation . . . . . . . .200
10.2.3 Some Economic Applications .204
1. The Keynesian IS-LM Model .204
2. Hopf Bifurcation in an Advertising Model .205
3. A Dynamic Demand Supply Model . . . . .207
4. Generalized Tobin's Model of Money and Economic Growth 208
10.2.4 Bifurcations in Discrete Dynamical Systems . 209
1. The Fold of Saddle Node Bifurcation. . 209
2. Transcritical Bifurcation. .210
3. Flip Bifurcation . . . . . . . . . . . .210
4. Logistic System. . . . . . . . . . . . .210
10.3 Chaotic or Complex Dynamical Systems (DS) .211
10.3.1 Chaos in Unimodal Maps in Discrete Systems · 212
10.3.2 Chaos in Higher Dimensional Discrete Systems. · 216
10.3.3 Chaos in Continuous Systems . . . . . · 216
10.3.4 Routes to Chaos . . . . . . . . . . . . · 217
1. Period Doubling and Intermittency . · 217
2. Horseshoe and Homoclinic Orbits. . .218
10.3.5 Liapunov Characteristic Exponent (LCE)
and Attractor's Dimension . . . . . . . . . .221
10.3.6 Some Economic Applications . . . . . . . .222
1. Chaotic Dynamics in a Macroeconomic Model . .222
2. Erratic Demand of the Rich . . . . . . . . . .224
3. Structure and Stability of Inventory Cycles .224
4. Chaotic economic Growth with Pollution .225
5. Chaos in Business Cycles .226
10.4 Catastrophe Theory (C.T.) . . . . . . . . .226
10.4.1 Some General Concepts . . . . . .227
10.4.2 The Morse and Splitting Lemma .228
10.4.3 Codimension and Unfolding .. .229
10.4.4 Classification of Singularities .. · 231
10.4.5 Some Elementary Catastrophes .232
1. The Fold Catastrophe . . . .232
2. The Cusp Catastrophe. . . . .233
10.4.6 Some Economic Applications . . 235
1. The Shutdown of the Firm (Tu 1982) . 235
2. Kaldor's Trade Cycle . . . . . . . . . . 236
3. A Catastrophe Theory of Defence Expenditure . 238
4. Innovation, Industrial Evolution and Revolution . 240
10.4.7 Comparative Statics (C.S.), Singularities and Unfolding. . 241
10.5 Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . .. . 243
xiv

11 Optimal Dynamical Systems 245

11.1 Introduction . . . . . . . . . .245
11.2 Pontryagin's Maximum Principle . . . . . . . . . .245
11.2.1 First Variations and Necessary Conditions .248
11.2.2 Second Variations and Sufficient Conditions .252
11.3 Stabilization Control Models . . . . . . . . . . . . . .253
11.4 Some Economic Applications. . . . . . . . . . . . . . 256
1. Intergenerational Distribution of Non-renewable Resources .. 256
2. Optimal Harvesting of Renewable Resources. .256
3. Multiplier-Accelerator Stabilization Model . . . . . .257
4. Optimal Economic Growth (OEG) . . . . . . . . . . .258
11.5 Asymptotic Stability of Optimal Dynamical Systems (ODS) .260
11.6 Structural Stability of Optimal Dynamical Systems . . . . . .263
11.6.1 Hopf Bifurcation in Optimal Economic Control Models and
Optimal Limit Cycles. . . . . 263
Two-State-Variable Models . . . . . . . . . . . . 264
Multisectoral OEG Models. . . . . . . . . . . . 265
11.6.2 Chaos in Optimal Dynamical Systems (ODS) . 267
11.7 Conclusion. . . . . . . . . . . . . . . . . . . . . . 268

12 Some Applications in Economics and Biology 271

12.1 Introduction . . . . . . . . . . . . . . . . . . . . 271
12.2 Economic Applications of Dynamical Systems . . 271
12.2.1 Business Cycles Theories. . . . . . . . . . 271
1. Linear Multiplier-Accelerator Models. . 272
2. Nonlinear Models . . . . . . . . . . . . 273
2.1. Flexible Multiplier-Accelerator Models . 273
2.2. Kaldor's Type of Flexible Accelerator Models . 275
2.3. Goodwin's Class Struggle Model . . 275
3. Optimal Economic Fluctuations and Chaos . 276
12.2.2 General Equilibrium Dynamics . . 276
Tatonnement Adjustment Process . 277
Non-Tatonnement Models . . 278
12.2.3 Economic Growth Theories . 279
1. Harrod-Domar's Models. . 279
2. Neo-Classical Models .. . 279
2.1. Two Sector Models . . 280
2.2. Economic Growth with Money . 281
2.3. Optimal Economic Growth Models . 282
2.4. Endogenous Economic Growth Models . 282
12.3 Dynamical Systems in Biology. . . . 284
12.3.1 One Species Growth Models . 284
12.3.2 Two Species Models . . 285
1. Predation Models . . . . . 285
2. Competition Models . . . . 288
12.3.3 The Dynamics of a Heartbeat . 288
 xv

12.4 Bioeconomics and Natural Resources . . . . .290

12.4.1 Optimal Management of Renewable
and Exhaustible Resources . . . . . . .290
12.4.2 Optimal Control of Prey-Predator Models .292
(i) Control by an Ideal Pesticide. .292
(ii) Biological Control . .293
12.5 Conclusion. . . . . . . . . . . . . . . . . .294

Bibliography 295
List of Frequently Used Abbreviations
and Symbols

1. Abbreviations

c.p., f.p. = critical points, fixed points

ODE or DE = ordinary differential equation, differential equation
d.e. = difference equation
D.S. = dynamical systems
ODS = optimal dynamical system
O.C., M.P. = optimal control, Maximum Principle
LDS = Lagrangean Dynamic System
GDS = Gradient Dynamic System
HDS = Hamiltonian Dynamic System
CHDS = Conservative Hamiltonian Dynamic System
PHDS = Perturbed Hamiltonian Dynamic System
1FT = Implicit Function Theorem
OEG = Optimal Economic Growth
B.T., C.T. = Bifurcation theory, Catastrophe theory
C.S. = Comparative Statics
H.O.T. = higher order terms
QED = quod erat demonstrandum
= end of proof, or "what was to be proved"
SP, SPP = Saddle point, Saddle point properties
xviii

2. Symbols

'or T = transposition e.g. A' == AT = transposed A

= identical to, equal to by definition
x=o=y = x is equal to zero and so is y
H, or D2 f(x) = Hessian [a~i2IxJ of f(x) : R n -t R

J, or Df(x) = Jacobian [M7] of f(x) : R n -t Rn

vf or gradf(x) = gradient of f(x) = (/!t, ... , I!-;;)

n

II
;=1
= product of n terms

L
;=1
= summation of n terms

E = surface of a section
( ,) = inner product
sgn = sign of

II II = norm
r, tr(A) = trace A = sum of diagonal terms of A
a(A) = spectrum of A
>'(A), >. = eigenvalues of A, eigen value >.
Re(>.), Im(>') = Real part of eigenvalue >., Imaginary part of >.
N(A) = nullity of A
kerA = kernel of A
R(A) = range of A
IAI or detA = determinant of A
codf = co dimension of f
r(A) = rank of A
Chapter 1
Introduction

A dynamical system (DS) describes the evolution over time of all points in a
given subspace of an n-Euclidean space. For example consumption c = (Cl, ... , en)
is a point in the commodity space. Similarly, price p E R+ is a point in the price
space and Walras' law p = kE(p) describes the evolution over time of prices in
response to excess demand E{p), with speed k where k = diag{kb k2 , ••• , kn ).
The term "evolution" implies position and velocity: at any point xES eRn,
a velocity vector may be derived (by simply differentiating x). The set of all such
velocity vectors in S is called a velocity vector field. The vector field will be assumed
smooth, i.e. continuous and continuously differentiable as many times as required.
Thus, from a knowledge of the initial position (xo) and velocity (xo) of a state, the
DS tells us where x will be and has been at any time t E (-oo, 00) i.e. the DS gives
the whole past and future life of x.
The evolution of x over time in the state space S is a flow ¢(t,x) : R x S -+
Rn where S C Rn at the various times t E (a, b) C R, or written differently,
¢t{x) : S -+ Rn, taking x into Xt. Clearly Xt = ¢t{x) == ¢(t,x) = position at
t of a path starting at x, and ¢o (x) == ¢( 0, x) = Xo by definition. The flow ¢t
satisfies the group properties ¢o = id and ¢t 0 ¢8 = ¢t+". This means that the
state y = ¢s{x) into which x goes after time s will itself go to state z = ¢t{Y) after
time t, i.e. z = ¢d¢8{X)] == ¢t 0 ¢8{X) = ¢t+8{X). In particular, for s = -t we have
¢t+8 = ¢t 0 ¢-t = ¢o = eO = id (identity). Thus ¢t and ¢-t are inverse of each other.
By an equilibrium or fixed point of a flow ¢ is meant ¢t{x) = xVt E R, i.e. a phase
point is itself a phase curve.
Given the DS
(1.1)
f is said to generate a local flow ¢t : S -+ Rn where ¢t{x) == ¢(x, t) is a smooth
function defined for all xES and t E (a, b) E R. For example, x = Ax gives rise to a
flow map ¢(x, t) = eAtx : Rn -+ Rn, i.e. eAt defines on Rn a flow which is generated
by the vector field Ax. Thus, f{x) is the tangent vector to the curve ¢t{x) at t.
Similarly, it can also be said that a DS ¢t on S generates a differential equation
system x = f{x), i.e.
(1.2)
where f can be considered a vector field on Rn, since to each point x E Rn, a
vector f{x), representing the velocity of the flow ¢t{x), is assigned. In other words,
Xt = ¢t{x) is a curve in an n-Euclidean space whose tangent (x) is equal to f{x).
Solving (1.1) for x{O) = Xo means finding a curve or flow ¢t{xo) passing through
Xo at t = 0 and satisfying (1.1) at all times. It is an integral curve of (1.1). The
family of all such curves forms a phase portrait of (1.1). Do solutions exist and how
many are there? If f is locally Lipschitz, i.e. if If{y) - f{x)1 ~ K{y - x) for x '" y
2

and K is the Lipschitz constant for f, then the solution exists and is unique. More
precisely

Theorem 1.1. Let f : S c Rn -7 Rn be a smooth C 1 map and Xo E S. Then there

exists some positive constant c and a unique solution <Pt(xo) : (-c, c) -7 S satisfying
= =
x f(x) in (1.1) with x(O) Xo as initial conditions.
Proof. See Coddington and Levinson (1955) or Hirsch and Smale (1974) for
example.

Note that in some cases, flat Euclidean spaces will be inadequate and curved
spaces (manifolds) will be necessary. The state space is now curved, and the velocity
vector will "stick out" of the space. All tangent curves passing through a point will
lie in the same plane and form the tangent space at that point. For example the
surface of a table on which a tennis ball sits is the tangent space at that point of
contact. Note also that, although tangent vectors stick out of the curved surface,
the integral or trajectory of a vector field stays in it. To see this, roll the ball slightly
so that the table surface becomes the tangent space of another nearby point of the
ball. Now instead of rolling the ball, we let these tangent spaces through each point
of the ball wrap around the ball, then the integral curves thus obtained stay on the
curved surface of the ball.
Where do these trajectories of the solution curves go? In the end, some con-
verge, either monotonically or periodically to a limit which could be a point or a
set of points such as a circle: these are stable. Some others will move away from
equilibrium, either to come back to it (for example the saddle connexion or homo-
clinic orbit) or never to be seen again (unstable). Some do not converge to any
limit: they come very close to an equilibrium point only to veer away from it (for
example all trajectories of a saddle point except those on the stable and unstable
arms). Some are attractors, attracting to themselves neighbouring curves (for exam-
ple stable Limit Cycles), others are rep ellers, repelling neighbouring curves. Some
go around and around for ever (such as the neutral stability of harmonic motions).
Some are locally stable, converging to an equilibrium from a nearby initial point,
others are globally (Liapunov) stable, converging to equilibrium from any initial
position. Some bifurcate into several branches, leading to chaos, some others display
discontinuous catastrophic jumps in response to an infinitesimal change of some pa-
rameter. These are all subject matters of DS. This book is devoted to an elementary
discussion of these, starting from differential and difference equations, proceeding
to some nonlinear systems such as Gradient, Lagrangean and Hamiltonian Systems,
then Bifurcation, Chaos and Catastrophes as well as optimal DS, illustrating the
discussion with some applications in Economics and Biology.
Before proceeding, let us note the difference between flows and maps, associated
respectively with continuous and discrete DS. In the first case - which has been
discussed so far - the time variable t is continuous (t E R) and the DS is represented
as
~~ == x = f(x). (1.1)
 3

Its solution can be represented as a flow whose velocity is given by the vector f(x),
as discussed above. In the second case, the variable time t is discrete (t E Z where
Z is the set of integers). In fact t is continuous but observations of Xt are made
and recorded at discrete points of time. For example, GNP is continuously evolving
over time but its measurements are taken and recorded once a year, or once every
quarter. This gives the discrete DS

(1.3)

which is usually referred to as a map or diffeomorphism. Smale (1967) has shown

that they are closely related i.e. (1.1) and (1.3) receive parallel treatment. For
example, a point x* is said to be a fixed point (f.p.) or equilibrium point for the
continuous system (1.1) if i: = f(x*) = 0 i.e., if <Pt(x*) = x* for all t E R. For the
discrete system (1.3), x* is said to be a fixed or equilibrium point if x; = f(x*) for
all t E Z (or x* = fm(x*) 'rim E Z). A f.p. x* is said to be stable for the continuous
system (1.1) if every eigenvalue of D f(x*) has negative real part and for the discrete
system (1.3) if every eigenvalue of D f(x*) in (1.3) has modulus less than one. A
f.p. x* is said to be hyperbolic for the continuous system (1.1) if its linearisation
matrix D f(x*) has no eigenvalues lying on the imaginary axis of the complex plane
and for the discrete system (1.3) if D f(x*) has no eigenvalues lying on the unit circle.
These are the differences between differential and difference equations which will be
seen in Chapters 2, 3, 5 and 6. Although diffeomorphisms merit a study in their
own right, in this book we shall focus our attention on continuous DS, and, in order
to avoid repetitions needed to refer to discrete DS each time, we shall leave it to
our readers to translate the results into their discrete counterpart, unless confusion
anses.
Chapter 2
Review of Ordinary Differential Equations

This chapter provides a brief review of Ordinary Differential Equations (ODE)

which is a first step in the understanding of Dynamical Systems (DS).
We shall start with first order differential equations (DE), then move on to
second and higher order DE, discussing both the complementary function and the
particular integral, using the undetermined coefficient method, inverse operator and
Laplace transform. The qualitative solution as well as stability analysis will also be
provided, with some economic applications.
We shall start with some basic concepts.

Definition 2.1. Ordinary differential equations (ODE) are equations involving

total derivatives. For example

dx lfx d"x) (2.1)

cp ( x, dt' dt 2 ' · · · ' dt n ,t = O.

When these derivatives are partial, (for example ~~, ~:) they are called partial
differential equations. Only ODE will be dealt with here.

Definition 2.2. The order of an ODE is given by the highest order derivative in-
volved. For example (2.1) is an nth-order ODE. The degree of an ODE is given by
the highest exponent of any derivative. For example, writing x == dx / dt, x == lfx / dt 2
etc ...
x+ax3 +bx+c=O (2.2)
is an ODE of order 2 and degree 3.

Definition 2.3. An ODE is said to be linear if it is of the first degree in the

dependent variable and it derivatives. For example

Definition 2.4. An ODE containing terms of a higher degree (than the first) is
called a non-linear ODE. For example

x + ax + bx2 = 0
x + ax3 + bxt = O.
6

Definition 2.5. By a solution of an ODE is meant any relation between the vari-
ables not involving derivatives and satisfying the ODE. The solution is also called
the integral curve of an ODE. For example the solution of x = ax for x(O} = xo
is x(t} = ceot = xoeot where c is an arbitrary constant to be determined by initial
conditions. Here c = xo since at t = 0, x(t} = ceo = c = xo. Note that the number
of initial conditions must be equal to the order of the ODE. Once these initial con-
ditions are given, there exists only one solution curve (of the solution family) that
goes through a specific point.

This could be formulated more explicitly as a theorem.

Theorem 2.0 Let x = f(x,t} be continuous with continuous derivative of/ax for
x in domain D and t in interval I, i. e. for xED and t E I. Then if Xo E D
and to E I, there exists a solution x*(t} defined uniquely in some neighbourhood of
(xo, to) satisfying the initial condition x*(to} = Xo.

Proof. The proof makes use of the Contraction Mapping theorem, itself an ap-
plication of Banach's Fixed Point Theorem, which is beyond this level. See any
standard textbook on Ordinary Differential Equations such as Pontryagin (1962),
Kaplan (1958), Coddington & Levinson (1955) among others. This theorem guar-
antees both the existence and uniqueness of the solution x(t} = cp(t}, by virtue of
the Contraction Mapping. Thus if there exists any other solution t/J(t} to x = f(x, t}
satisfying x(to} = Xo, for a < t < b where I = [a, b], then cp(t} and t/J(t} are identical
curves.

2.1. First Order Linear Differential Equations

First order linear differential equations are of the form

ao(t}x + al (t}x = G(t) (2.4)

with ao(t} =I 0 this may conveniently written as

x + a(t}x = g(t} (2.5)

where a(t} == al(t}jaO(t} and g(t} == G(t}jao(t}.

The case in which the RHS of (2.4) or (2.5) is zero, x + a(t}x = 0 is called
the homogeneous linear differential equation and where g(t} =I 0, it is called a non-
homogeneous equation. The case in which a(t} = a, a constant, it is called the
constant coefficient linear differential equation. In general a(t} is some function of
time t, and (2.5) is called the variable coefficient differential equation. These cases
will be treated separately, starting with the analytic solutions and followed by the
qualitative solution.
 7

2.1.1. First Order Constant Coefficient Linear

Differential Equations

The Homogeneous Case. x + ax = o.

Theorem 2.1. The solution to

x + ax = 0, given x(O) = Xo (2.6)

is
x(t) = xoe- at . (2.7)

Proof. Writing (2.6) as dxjx = -adt and integrating, gives lnx = -at + c and
e1nx == x(t) = e-ate c where eC == A, some arbitrary constant to be determined by
initial conditions Xo. This gives eC = Xo = A.
If a = 0, integration gives x(t) = c, some constant which, with the given initial
conditions x(O) = xo, gives x(t) = xo, i.e. x(t) maintains its initial value Xo over
time.

Example 2.1. The solution of x + 0.5x = 0; Xo = 2, by (2.7) is x(t) = 2e- O•5t •

The Non Homogeneous Case.

The typical form is

x + ax = b, x(O) = Xo (2.8)

Theorem 2.2. The solution to (2.8) is

x(t) = Ae- at + bja if a =I 0 (2.9)

x(t) = bt + Xo if a = 0 (2.10)

where A is an arbitrary constant to be determined by initial conditions i.e.

A=xo-bja.

Proof. Defining y == x - bja (a =I 0) i.e. x == y + bja we can re-write (2.8) as

iJ + a(y+ bja) = b
iJ + ay = 0
8

the solution of which, by theorem 2.1, is

y(t) = yoe- at

or x(t) = (xo - b/a)e-at + b/a (a:F 0).

If a = 0, x = b which gives, on integration
x(t) = bt + c = bt + Xo
where c is the constant of integration, which is Xo.
Remark 2.1. The solution (2.9) has two parts xc(t) == Ae-at called the complemen-
tary function, which is the solution to the homogenous part of (2.8) i.e. to x+ax = 0,
and Xe == xp = b/a called the "equilibrium" value or "particular integral" of (2.8),
obtained by putting x = 0 in (2.8). It is easy to show that if xc(t) and xp are each a
solution of (2.8), so is their sum x(t) = xc(t) + xp. The equilibrium Xe is also called
a "fixed point" defined as x*(t) which makes x = o.
Remark 2.2. With this, the solution (2.9) could be looked at in a new light:
Xe or xp is the equilibrium of x(t) and xc(t) = Ae-at == (xo - xe)e- at
indicates the deviation of the trajectory x(t) from its equilibrium level Xe = b/a
over time. This deviation grows exponentially overtime at rate a if a < 0 and
decays to zero if a> 0, i.e. liffit-too xc(t) = limHOO (xo - b/a)e-at ~~ ifr:;~ The .
first case (a < 0) is said to be unstable since liffit-too x(t) = 00 and the second
case (a > 0) is said to be (asymptotically) stable since limHoo x(t) = b/a a given
constant.

X(t) X(t)
~a<o
Xel-------- b/a 1-------- b/a = Xe
a<O
L...-------t L...-------t

Figure 2.1. Unstable Figure 2.2. Stable

x(t) = Ae-at + b/a x(t) = (xo - xe)e- at + b/a

As can be seen (Figures 2.1 and 2.2) the deviation xc(t) = (xo - x.)e- at from its
equilibrium level b/a decreases over time when a > 0 and increases over time when
a < o.
Remark 2.3. In terms of Remark 2.2, we can solve (2.8) directly by finding its
equilibrium,for x = 0 i.e. ax = b giving xp = b/a = x •. As for the complemen-
tary function, theorem 2.1 (or 2.2) assures us that the solution takes some form
 9

xc(t) = Ae>.t. We can therefore assume it is of this form and x(t) = Ae>.t, and hence
x = >.Ae>.t for some constant, yet undetermined>., then write the LHS of (2.8) as
x + ax == Ae>.t(>. + a) = o. (2.11)

Since Ae>.t =f: 0, >. = -a and xc(t) = Ae-at as required. The complete solution then
is
x(t) = xc(t) + Xe = Ae-at + b/a (2.12)
which is (2.9).
A is given by the initial condition x(O) = Xo, i.e. at t = 0, x(t) = Xo = Aeo+b/a =
A + b/ a giving A = Xo - b/ a == Xo - Xe which is the initial deviation of the trajectory
x(t) from its equilibrium at t = o.

Example 2.2. x + 2x = 10; Xo = 8 gives

x(t) = 10/2 + (8 - 1O/2)e-2t

= xp + xc(t)

as shown in theorem 2.2.

Clearly limHoo x(t) = 5 + 0, i.e. the initial deviation Xo - Xe = 3 from its equilibrium
level b/a = 5 decreases over time and x(t) tends to its equilibrium value Xe = 5.

2.1.2. Variable Coefficient First Order Linear

Differential Equations

The typical equation is of the form

x + a(t)x = g(t) (2.13)

where a(t) is some function of t, a variable coefficient, as against a(t) = a (constant)

in the previous case. Again we shall treat the homogeneous case where g(t) = 0
first, and then the non-homogeneous case where g(t) =f: 0 as in (2.13).

Theorem 2.3. (Homogeneous case) The solution to

x + a(t)x = 0, x(O) = Xo (2.14)

is
x(t) = Aef a(t) dt
where A is an arbitrary constant to be determined by the initial condition x(O) = Xo.
10

Proof. Rewriting x + a{t)x = 0 as

dx
- = -a(t)dt
x
and integrating gives
lnx + c = - Ja{t) dt
or e1nz == x{t) = e-Ce- I a(t) dt == Ae- I a(t) dt. (QED)

Example 2.3. x + 2tx = o.

In this case a(t) == 2t,

and the solution is x(t) = Ae- 12tdt = Ae- t2 .

Theorem 2.4. (Non-Homogeneous case) The solution to

x + a(t)x = g(t) (2.15)

is
x(t) = e- I a(t) dt[A + Jg(t)eI a(t) dt dt] (2.16)

1t
Proof. Note that (xel a(t) dt) = el a(t) dt[x + a{t)x] which is just the LHS of (2.15)
multiplied by el a(t) dt. Multiplying both sides of (2.15) by el a(t) dt which is called
the integrating factor (Lf.) gives

el a(t)dt(x + a{t)x) = el a(t)dtg{t).

Integrating both sides gives

xel a(t)dt = Jel a(t)dtg{t) dt + A (2.17)

x(t) = e- I a(t) dt[A + Jg{t)eI a(t) dt dt]

where A is an arbitrary constant to be determined by initial conditions. But this is

(2.16). (QED)

Example 2.4.
x +2xft = 5t2.
In this example a(t) == 2ft, iJ. == el a(t) dt = e2 It dt = e1n t2 = t 2.
(2.17) gives xt 2 = I 5t 2t 2dt + c = t 5 + c Le. the solution is xt 2 = t 5 + c.
 11

Example 2.5.
. 1
x+-x=t
t
a(t) = t. iJ. = el t dt = elnt (2.17) gives
x(t)elnt = Jelnttdt Jedt
=

x(t) = e- Int Jt dt 2

= e-In t (t; + c) t; + i .
=

Example 2.6. i; + ax = b (a constant). The iJ. is el adt = eat. Application of

(2.16) gives

x(t) = e-atlj beat dt + A]

= Ae- at + bja
which is exactly (2.9). Thus the constant coefficient case emerges as a special case of
the variable coefficient differential equations and could be solved by the integrating
factor discussed in this section.

2.1.3. Equations Reducible to Linear Differential Equations

The equation
i; + a(t)x = g(t)x n (n i- 0,1) (2.18)
is called the Bernouilli's equation, after James Bernouilli who solved it in 1695. It
is non linear, because of the presence of x n , but could be made linear by dividing
through by xn and defining the new variable y == x 1- n
x-ni; + a(t)x 1- n = g(t)
or, in the new variable y,

_1_ iJ + a(t)y = g(t)

I-n

iJ + (1 - n)a(t)y = (1 - n)g(t) (2.19)

which is exactly the variable coefficient linear case of (2.13) and is solvable by the
same method.
The constant coefficient case where a(t) = a (constant) and g(t) = b, also a
constant, is exactly iJ + o:y = f3 in (2.8), after changing the variable y == x 1- n , and
could be solved by the method of theorem 2.2.
12

Example 2.7. x - f = _t 2 X 3 •
As in (2.19), multiplying through by - 2x- 3 (== (1 - n)x- n ) gives
dx 2 2
-2x- 3 - + _x- = 2t 2 •
dt t
Substituting y == x- 2 gives
dy +~y= 2t2
dt t
which is similar to Example 2.4 above.

2.1.4. Qualitative Solution: Phase Diagrams

So far, we have discussed the quantitative solution of the differential equation x =

f(x, t) which gives the position of x(t) at each time t. However, not all differential
equations can be solved quantitatively. When this happens, the qualitative solution
must be used. Note that even when quantitative solutions are possible, qualitative
solutions are sometimes more useful and more interesting, especially when we are
only interested in the structure and stability of the system.
Qualitative solution is obtained by use of phase-portrait diagrams. This consists
of representing the initial state Xo of an autonomous differential equation of the form
x = f(x) by a point which moves with velocity x = f(x) on the phase line as time
increases. The phase-portrait displays only the direction of the velocity of the phase
point, not the actual magnitude of this velocity, hence it is called the qualitative
solution.
Consider the equation
x= f(x) (2.20)
with the linear equation
x=ax (2.21)
(a constant) as a special case.

:i; = f{x) :i; = ax

(J' > 0) (a > 0)

-~+--~----x ------~~-------x

:i; = f{x) :i; = ax

(J' < 0) (a < 0)

Figure 2.3. x= f(x) Figure 2.4. x = ax

 13

Clearly ± > 0 above the horizontal axis i.e. x increases over time as indicated
by arrows going from left to right (see figure 2.3 and 2.4). Similarly ± < 0 below
the horizontal axis, i.e. x decreases over time. If f(x) is an increasing function, the
arrows showing the direction of the velocity of x, rise from left to right above the
horizontal axis and fall from right to left everywhere below the horizontal axis. On
the horizontal axis itself, ± = 0 Le. x remains unchanged: it is an equilibrium or a
fixed point, (see figure 2.3 and 2.4) which is a stable equilibrium if f'(x) < 0 Le. if
f(x) is a decreasing function and an unstable equilibrium if f'(x) > 0 Le. if f(x) is
an increasing function. The case f(x) = ax is a particular case, the linear case, and
follows the same rule. The stable fixed point (where a < 0 or f'(x) < 0 at ± = 0)
is called an attractor in that the system is attracted to it from above and below
the horizontal axis. The unstable fixed point (where a > 0 or f'(x) > 0 at ± = 0,
Le. at the point of intersection of the trajectory with the horizontal axis) is called a
repeller in that the system moves away from it. The fixed point through which the
system goes without reversing its direction, is called a shunt (see figure 2.5 (e) and
U)). Some examples are

x = x(a-bx)
(a,b> 0)

o
--~~----nr----~~--x
p
o
o
o o
o o
°
EO° ~:E E °° JIr
(repellei) (attractor) (repeller)

Figure 2.5.(a) Figure 2.5.(b)

± = x(a - bx) (a, b > 0) ±=x2 -1
(the logistic curve)

X =ax 3 x = ax 3
(a < 0 (a >0)

--------~~~--------x --------~-rn~--------x

--------~JIr~o~<~-------x ------~<E--.o~->~------x

Figure 2.5.(c) Figure 2.5.(d)

o is an attractor o is a repeller
14

Z z=ax 2
(a > 0)
z =ax 2
(a < 0)
--------~~~--------x --------~~~--------x

E
o E

Figure 2.5.(e) Figure 2.5.(f)

o is a shunt o is a shunt

2.1.5. Some Economic Applications

1. Walrasian Tatonnement Process.

Walras visualizes market equilibrium as a result of a tatonnement process: at a

"referee's" announcement of the price p, buyers and sellers make their bid. If this
bid results in an excess demand E(P) ~ 0 price will rise until the equilibrium, at
which supply equals demand E(P) = 0 is reached, and vice versa for an excess supply
i.e. p = k E(p) where k is a positive constant reflecting the speed of adjustment and
E(p) == D(p) - S(p) = excess demand. As an example, consider the linear case
where D(p) = a + (3p and supply S(p) = ,+ 8p. This gives, for p(O) = Po

p = k[a + (3p - , - 8p] = k((3 - 8)p + k(a - I). (2.22)

This is a first order constant coefficient linear differential equation (2.8), whose
solution is, by (2.9)

p(t) = , -
(3-8
a+ (po _,- a) e
(3-8
k (fJ- 6)t
(2.23)

which is stable if (3 - 8 < 0, and unstable otherwise. But (3 = slope of demand curve
and 8 = slope of supply curve, and when (3 - 8 < 0, (which is always fulfilled when
demand is downward sloping and supply is upward sloping), the market is stable
i.e. excess demand is reduced and eventually wiped out by rising prices. If (3 - 8 > 0,
it is unstable: continuous and indefinite inflation will take place.
 15

2. The Keynesian Model.

Consider a macro economic model in which income (Y) rises in response to

excess aggregate demand (D - V). For a simple closed economy, with Investment
(1) and government expenditure (G) both exogeneously given, aggregate demand is
consumption (C) plus 1 plus G. Consumption is an increasing function (assumed
linear) of income, i.e. C = Co + cY where Co, c > 0 the dynamic model is, for a
constant positive k,

Y = k(D - Y) = k(eo + cY + 1 + G - Y]
= k(c -I)Y + k(eo + 1 + G). (2.24)

This is a typical first order linear differential equation of the type (2.8) where
a == k(1 - c) and b == k(Co + 1 + G), whose solution, by (2.9), is

Y(t) = Co+1+G +
l-c
(1'0- Co+1+G)
l-c
ek(c-l)t.

Clearly the stability condition is c - 1 < 0 i.e. the marginal propensity to consume,
c, is less than unity.
For the non-linear increasing consumption function. C = C(Y) where C' > 0,
(2.2.4) is
Y = k(D - Y) = k[C(Y) - Y + (1 + G)] == kf(Y)
where f(Y) == C(Y)-Y +1+G. Clearly, the modelisstable if f'(Y) == C'(Y)-1 < 0
and unstable if f'(Y) > 0, i.e. stable if C' < 1 or the marginal propensity to consume
(C') is less than one. At Y = 0, f (Y) = 0 i.e. C (Y) + 1 + G = Y, aggregate demand
(D) = aggregate supply (Y).

I(Y)

-.orl-----------~~---------Y

Figure 2.6. Dynamic Keynesian model

16

3. Harrod-Domar's Economic Growth Model.

Harrod (1939) and Domar's (1946) growth models are often presented together
in view of the similarity of their results, although they are different. They are
interesting applications of differential equations. Harrod assumes (i) Saving (8)
is a linear increasing function of income, 8 = sY(O < s < 1), (ii) capital K(t)
accumulates in response to increases in income, K == 1= vY where v is a positive
constant capital output ratio and (iii) 8 = I this gives

8= sY= vY = I

or
Y= (s/v)Y (2.25)
whose solution, by (2.7) is
Y(t) = Yoe(s/v)t
where s / v is the ''warranted rate of growth g.. " of the economy, the rate which keeps
producers happy with their investment decisions.
The model is "unstable" not in the sense that Y(t) -+ 00 as t -+ 00 but in the
sense that, should income rise less quickly than would be required to warrant the
level of investment, then there would be overproduction (i.e. production in excess of
what could be sold). If, on the other hand, income (production) rises more rapidly
than gw, there would be underproduction. Thus if production increases too fast, we
would have produced too little. The gap between the actual (gt) and warranted (gw)
rate of growth would be widened overtime and hence the economy is unstable.
Many attempts have been subsequently made to formalize this "paradoxical"
result, leading to different conclusions. Jorgensen (1960) confirms instability and
Rose (1959) proves stability. We shall only present Rose's argument (see also Hahn
Mathews 1964) which provides in itself an interesting application of first order dif-
ferential equations. Let the actual rate of growth of capital be gt == Kt/ K t and K;
be the desired capital stock. Suppose at date t, producers, being caught short of
capital, want to catch up in T periods from now and expect output to grow at the
warranted rate gw' Then

or
InKt + gT = InKt + gwT
gt - gw == ! (InKt -lnKn = -~ (InKt -lnKn
or
. 1
x=-f x (2.26)

where x == InK -lnK* == In(K/K*).

The solution, by (2.7) is
 17

Clearly as t ~ 00, x(t) ~ 0 i.e. In(KI K*) ~ 0 i.e. KI K* ~ 1 or K t ~ K*

overtime and the system is stable.
Domar (1946) examines the dual aspect of investment (I): it creates income (and
employment) by the Keynesian multiplier (8- 1 where 0 < 8 < 1 is the constant
marginal propensity to save): dyt = 8- 1dlt or l' = jl8 and creates productive
capacity (P) : P = KIv == 118 where V-I is the investment productivity. Moving
equilibrium requires the demand generated (1' = j18) to be equal to the capacity
created (P = 1 Iv). i.e.
. 8
1--1=0 (2.27)
v
the solution of which, by (2.8) is
I(t) = loe(a/tJ)t
i.e. Investment must grow at Harrod's ''warranted rate" 9w = 81v. It is easy to show
that so long as v and 8 are constant, 1'/Y = j I 1 = 81v (since Harrod's 1 = 8Y
gives 1'/Y = j I I), Harrod and Domar's results are the same.

4. Domar's Debt Model {1944}.

Domar assumes continuous full employment is maintained by deficit spending

and that the ratio of the deficit (D) to gross national product (Y) is constant i.e.
D= kY(t) = kYoert
where Y(t) = Yoe rt i.e. Y is assumed to grow at a constant rate r. This is a special
case of (2.13) whose solution is

t = -k Yoe rt + A == Do + -k Yo (rt
D () e - 1)
r r
and the debt ratio DIY is

D(t) = (Do _ ~) e- rt + ~.
Y(t) Yo r r
Clearly this is stable.

5. Profit and Investment.

In an economy where profit (1r) is a decreasing function of the capital stock (K)
and investment (I == K) is an increasing function of profit, the behaviour of capital
stock could be described as
1r = -{3K
K = 0'1r + A = -O'{3K + A (2.28)
18

where a, /3 are positive constant coefficients and A is autonomous investment,

assumed constant. The solution by (2.9), is

K{t) = {Ko - Ala(3)e-o~t + Ala/3.

The model is stable.

6. The Neo-Classical Model of Economic Growth.

The instability of Harrod-Domar's economy partly stems from the rigidity of its
technology: its production function, of the type Y = min (~ , ~) does not allow
any factor substitutability. This is corrected by Swan (1956) and Solow (1956) in
their neo-classical model which is based on the following assumptions.
(i) Labour (L) grows at a constant rate n i.e. tiL = n
(ii) All saving S = sY are invested in capital (K) formation I = 1< + 8K (s,8
are constant positive fractions)
(iii) Production takes place under constant returns conditions:

Y=F{K,L) = LF{KIL, 1) ==Lf{k) where k==KIL.

These lead to the fundamental dynamic equation

k 1< t sY
k= K - L= K - (8 +n)k

k= sf{k) - Ak where A == 8 + n (2.29)

where f{k) is increasing concave differentiable function 1" < 0 < l' obeying Inada's
conditions limk-+O f'{k) = 00 and limk-+oo f'{k) = O.
For the case of the Cobb-Douglas production function Y = KO Ll-o (O < a < 1),
YI L = KO L - 0 == kO == f (k) and the fundamental growth equation is

(2.30)

which is the Bernouilli equation (2.18). Defining x == k1- 0 and substituting gives

x= -{1 - a)Ax + (1 - a)s

which is of the form of (2.8). The solution is

x{t) = {xo - s I A)e-(I-o)>.t + xl A

or, in the original variable k, remembering that x == k 1 - o ,
k1- 0 = {k~-O _ sIA)e-(I-o)>.t + SIA.

Clearly the model is stable.

 19

Coming back to the general case of y = / (k), we can use a phase diagram to
solve the problem qualitatively, as follows

k = s/(k) - >'k
>'k

--~--------------~~----k
o

~4~O~~------------~~~k-·~~~--k

Figure 2.7. k= s/{k) - >'k

It can be seen that the origin (k = 0) is a repeller and k* > 0 at which k = 0 is

an attractor or a stable equilibrium: any initial ko < k* will move up to it and any
ko > k* will decrease to it in time.

2.2. Second and Higher Order Linear Differential Equations

An n-order linear differential equation is of the form

ao{t)xn + al{t)xn - 1 + ... + an_l{t)i: + an{t)x = g{t) (2.31)

where g{t), ai{t) (i = 0,1,2, ... , n with ao{t) =F 0) are any differentiable functions of
time and xn = = =
{d n/dtn)x with i: {d/dt)x, x (rP /dt 2 )x etc ...
Using the operator Di = di/dti{i = 0,1, ... ,n) on x, for example
= = = =
DOx {~/dtO)x x; Dx {d/dt)x, D 2 x (rP/dt 2 )x, we can write (2.31) as

[ao{t)Dn + al{t)D n - 1 + ... + an-l(t)D + an(t)]x{t) = g{t) (2.32)

or
L{D)x(t) = g(t) (2.33)

where L(D) represents all the terms inside the square brackets of (2.32).
20

The above differential equation is called a homogeneous if g(t} = 0

non-homogeneous if g(t} -::F 0 and constant coefficients equation if a;(t} = a; = con-
stant for each i. Without loss of generalities, we can set ao(t} = 1 (since ao(t) -::F 0,
otherwise (2.31) would not be of order n, we can divide (2.31) through by ao(t}}.
By solution is meant any function x(t} which does not involve derivatives and
which satisfies (2.31) when substituted to it. If Xl(t}, X2(t}, ... , xn(t} are each a
solution of (2.31), so are c;x;(t} and Ei C;Xj(t} (i = 1,2, ... , n). The solution xc(t}
of the homogeneous part (with g(t) = 0 in (2.31)) i.e. L(D}x = 0 is called the
complementary function xc(t} and the solution xp(== xe} to (2.31) satisfying g(t}
i.e. L(D}xp = g(t}, is called particular integral xp. The complete solution is their
sum i.e.
X(t} = xc(t} + xp'
For example x-£-.i+x == (D3 _D2_D+ l}x = 5 has solution x(t) = 5+cle- + t

Clef + C2tet == xp + Xc where Cl. C2, C3 are arbitrary constants.

These solutions x;(1 = 1,2, ... , n} are independent iff their Wronskian W(t)
determinant does not vanish, i.e.

Xl
X, Xn
X' )
W(t) == det (
:1 n -::F O (2.34)
n-l X~n-l)
Xl

For example if the solutions of (2.31) are e~lt, e~lt, . .. ,e~ .. t where A; are all distinct,
then W(t) -::F 0, since

e~lt e~lt e~ .. t 1 1 1
Ale~lt A2e~lt Ane~ .. t
W(t) == = e(~l+"+~n)t Al A2 An

Ai-le~lt A2-le~lt An-le~nt

n Ai- l An
n-
l

= ±e(~l+~l+"+~n)t(Al - A2)(Al - A3) ... (An-l - An) -::F O.

Note that the last determinant is a Vandermonde determinant which is non-zero if

Aj -::F Ai for all i -::F j (i,j = 1,2, ... , n).

Example 2.8. The solution of x -6£ + ll.i - 6x = 0 is x(t) = (e t , e2t , e3t ) which
has the Wronksian W(t) (-::F 0)

et e2t 33t 1 1 1
W(t) = e 2e 3e = e 1 2 3 = 2e6t
t 2t 3t 6t -::F O.
et 4e 2t ge3t 149

The particular case of n = 2, i.e. the second order differential equation

 21

a(t)x + b(t)i; + e(t)x = d(t) (2.35)

will be reviewed in this chapter, with particular attention being devoted to the
constant coefficient case where a, b, c are constant, with a = 1 and also d(t) = d
constant, i.e.
x + bi; + ex = d. (2.36)
We shall examine the complementary function xc(t) and the particular integral
Xp separately, concentrating on the case of second order constant coefficient.

The Complementary Function xc(t).

The complementary function xc(t) is obtained by finding the x(t) which satisfies
L(D)x = O. In the light of theorem 2.2 (see also Remark 2.3), we can try a solution
of the form x(t) = eAt. Substituting into (2.38) gives L(D)x = 0 on

(D2 + bD + e)x == x + bi; + ex = 0 (2.37)

eAt (A2 + bA + e) = O.
Since eAt =I 0, the characteristic equation A2 + bA + e = O. This gives the
t(
solution A = -b ± Jb 2 - 4c) == (AI, A2)' Thus eAit (i = 1,2) are solutions and so
is Ale A1t + A2e A2t where AI, A2 are arbitrary constants to be determined by initial
conditions. Clearly b2 - 4c ~ 0 and three cases must be examined separately.
>
Case (i) b2 - 4c > 0: The characteristic equation has two real and distinct roots
(i.e. Al =I A2, AI, A2 real).
(2.38)
t(
Case (ii) b2 - 4e = 0, A = -b ± 0) = -b/2 = Al = A2: the characteristic equation
has two identical roots A = -b/2. The solution to be tried is now x = teAt, not eAt
since this would lead to x(t) = Ae At where A = Al + A2 and A is determined by
two initial conditions Xo and x'(O). Differentiating i; = (1 + At)e At , x = (2A + A2t)e At
and substituting into L(D)x = 0 gives

(2.39)

Case (iii) b2 - 4e < 0 : A is a complex root, i.e.

b J(b 2 - 4e)i 2 b iJ4e - b2 _ .

A= - - ± =- - ± = a ± zf3
2 2 2 2

where a == Re(A) == -b/2, the real part of A and f3 == ";4~-b2 , the imaginary part of
A and i 2 = -1.
The complementary function is
22

Xc(t) = A l e>'1 t + A 2e>'2 t

= Al eCa +i,6)t + A 2eCa - i ,6)t
= eat (A l ei,6t + A 2e- i,6t), but e±i,6t == cos f3t ± i sin f3t
= eat[Al(Cosf3t + isinf3t) + A2(cosf3t - isinf3t)]
= eat ( Bl cos f3t + B2 sin f3t) (2.40)

where Bl == Al + A2 and B2 == i(Al - A 2), both Bl and B2 being real numbers.l In

alternate form, xc(t) could also be written as 2

(2.41 )

The above discussion could be summarized in the form of a theorem.

Theorem 2.5. The second order linear differential equation with constant
coefficients of the form

L(D)x == (aD2 + bD + c)x == ax + b:i: + cx = 0 (2.42)

where a -# 0, set equal to 1 f01' convenience, with the associated characteristic

equation
c(A) == A2 + bA + c = (A - At}(A - A2) = 0 (a = 1) (2.43)
has the following solution {with arbitral'y constants A, AI, A 2, B l , B 2.

(i) (2.44 )

if Al and A2, the roots of c(A) = 0, are real and simple (i.e. distinct);

(ii) (2.45 )

if Al = A2 == A al'e real and equal i.e. real and of multiplicity 2 (see Ch. 4).
(iii) X(t) = eat(Bl cos f3t + B2 sin f3t) (2.46)
== eat A cos{.f3t - f)
if the roots of C(A) = 0 is a pair of complex number i.e. Al = o:+if3, A2 == 'Xl = o:-if3
where of course, 0: == -b/2 = Re(A) and f3 == ~J4c - b2 == Im(A) and i = p.

IFrom BI == Al + A2 and B2 = i(AI - A 2) we have (! _~) ( ~~ ) = ( ~~ ) ,solving

( ~~ ) = ~ ( ~: ~ ~~~ ) . Thus Al and A2 are conjugate complex numbers, i.e. A2 = AI. But
then BI = Al + A2 and B2 = i(AI - A 2) will be real numbers. For example if Al = a + ib,
A2 == Al = a - ib then BI = a + ib + a - ib = 2a and B2 = i(a + ib) - i(a - ib) = -2b. Hence BI
and B2(== i(AI - A 2» are both real numbers.
2put BI = Acos!, B2 = A sin! we have tan! = sin, = BB, i.e. c = tan- I (~BB ). ~B< B2
cos 1
=
f

=
1 1

But BI cos /3i + B2 sin Oi A( cos c cos /3i + sin c sin /3i) A cos(/3i - c) which is a trigonometric
oscillation with period 27r / /3 and amplitude A. Note that had we defined B2 = -A sin c, we
would have, for (2.46), xCi) = eat A cos(/3i + c) (as in the first edition), which is the same, since
cos c = cos( -f).
 23

Note that AI, A2 and B 1 , B2 are all real arbitrary constants, to be determined by
initial conditions and ACOSf == B I , Asinf = B 2, A ±.JB? + B?,
f == tan-I(Bd Bd. (See footnote 2). Note also that a and f3 are both real numbers.
Note that (2.42) is the case of homogeneous differential equation. If (2.42) is
L(D)x = d then the above results in (2.44), (2.45) and (2.46) are the solution to
the homogeneous part L(D)x = 0 or to the complementary function L(D)x = O. In
this case, to avoid confusion, the solution x(t) in (2.44), (2.45) and (2.46) should be
written as x c ( t) since the complete solution is

x(t) = xc(t) + xp(t) (2.4 7)

where xp(t) is the particular integral. For example if L(D)x = ax + bi: + cx = d,

then xp(t) = d/e (e i- 0).
Finally note the case in which )1] = 0 = A2, implies b = 0 = c since a i- 0
(otherwise it will not be a second order differential equation), (2.40) with a = 1
is reduced to x = 0 whose solution, obtained by direct integration (i: = Al and
x = Alt + A 2) is a linear function of time

(2.48)

Example 2.9. x + i: - 6x = 0 or (D2 + D - 6)x = O.

The auxiliary or characteristic equation is A2 + A - 6 = 0 the solution of which is
A = (2, -3). The complementary function

Example 2.10. 2x + x - x = 0, Xo = 3, X(O) = 2.

The characteristic equation is 2A 2 + A-I = 0 gives A = (1/2, -1). This is case (i)
where two roots are real and distinct. The solution, by (2.41) is
x(t) = A l eo. 5t + A 2e- t = 1f et / 2 - ~ e- t where (AI, A 2) = (10/3, -1/3) as obtained
by solving x(O) = AI(l) + A 2 (1) = 3 == Xo at t = 0 and X(O) = .5A I (1) - A 2 (1) = 2
at t = O.

Example 2.11. x - 6± + 9x = O.
The characteristic equation A2 - 6A + 9 = 0 gives A = 3 ± v'o this is case (ii) of
repeated roots. The solution is

Example 2.12. x + 25x = 0; A = ±5i, the solution is, by (2.46) case (iii) is
x(t) = BI cos 5t + B2 sin 5t. This is a particular case of (iii) where a = 0,
x(t) = Acos(f3t - f), the solution x(t) fluctuates for ever: it is said to have neutral
stability.

Example 2.13. j: - 4.i: + 13:r = 0, A = 2 ± 3i, the solution, by (2.43), is

x( t) = e2X ( BI sin 3t + B2 cos 3t}. It is periodically divergent on account of Re( A) =
2 > O. It is unstable.
Note that the arbitrary constants AI, A 2, BI and B2 above can be definitized or
quantized, once initial conditions are given, as in the following example.
24

Example 2.14. x + 2x + lOx = 0; Xo = 5, X(O) = 4.

A2 + 2A + 10 = 0 gives A = -1 ± 3i and the solution is
x(t) = e-t(Bl cos 3t + B2 sin 3t) (by 2.40)

At t = 0, Xo = 5 = e-O(B1 cosO + B 2 sinO) = Bl +0 = 5. Hence Bl 5.

Differentiating x'(O) gives for t = 0,

x'(O) = -e-t(B1 + 0) + e- t ( -3Bl sin 3t + 3B2 cos 3t)

= - Bl + 3B2 = 4 = -5 + 3B2 = 4 =} B2 = 3.

The solution is thus, by (2.43)

x(t) = e- t (5 cos 3t + 3 sin 3t).

In the alternate form, x(t) = e-t[A cos(3t-()] we have tan ( = sin (I coS(= B21 Bl =
315, i.e. ( = tan-1(Bd Bd ~ 30.96. A = Bd cos ( = Bd sin ( = JBl + ~ 5.83 m
and in the alternate form (2.46), the solution is

x(t) = e- t [5.83 cos(3t - 30.96)]

a sinusoidal function of amplitude A = 5.83, damped by e- t , with period 211'/3. It

is periodically convergent and hence asymptotically stable.

2.2.1. The Particular Integral (xp or xe)

where d(t) = d Constants

As in first order equations (Remark 2.1), xp is obtained by finding the "fixed

point" x such that x = 0 = x. Substitution into (2.38) gives ex = d or Xp = die
provided e # O. This is equivalent to trying the solution Xp = k where k is any
constant. This gives xp = 0 = xp. Substitution into (2.38) gives exp = d or

xp == # 0).
Xe = die (e
If e = 0, try Xp = kt which gives xp = k, xp = O. Substitution into (2.38) gives
bk = d i.e. k = dlb and xp = kt = dtlb. If b = 0 = e, try xp = ke, differentiate
xp = 2kt; xp = 2k, and substitute into (2.38) gives 2k + 0 + 0 = d or k = d/2,
.I.e. xp = kt 2dt
2' = 2

Thus the particular integral Xp of (2.38) is

xp = die if e #0
Xp = dtlb if e = 0 (2.49)
dt 2
Xp = -2- if e = 0 = b.
 25

2.2.2. The Particular Integral (xp ) when d = g(t)

Is some Function of t

When the function g(t) on the RHS of L(D)x = g(t) is some function oftime, the
most commonly encountered being polynomial, exponential and trigonometric func-
tions and their combinations - several methods could be used to find the particular
integral. The most commonly used are the following.

1. The Undetermined Coefficients Method.

This consists of trying a function of the same nature. For example

g(t) Xp(t) to try

{tn, t n .1, ... , t, I}
eat, e- ot eat, e- ot (2.50)
cos at {sin at, cos at}
sin at {cos at, sin at}

Example 2.15. x- 4x + 4x == (D2 - 4D + 4)x = t 3 + 2t + 3 + 32t

xc(t) = (A1 + tA2)e2t

For x p , try

xp = at 3 + bt2 + ct + d + pe 2t t 2
xp = 3at2 + 2bt + c + 2pe2tt2 + 2tpe2t
x = 6at + 2b + 4pee2t + 8pte2t + 2pe2t .
Substituting into the original equation gives

(D2 - 4D + 4)x = 4at3 + (-12a + 4b)t2+ (6a - 8b + 4c)t + (2b - 4c+ 4d) + 0 + 2pe2t.
Equating coefficients gives
4a = 1 ~ a = 1/4
4b -12a = 0 ~ b = 3/4
6a - 8b + 4c = 2 ~ c = 13/8
2b - 4c + 4d = 3 ~ d = 2
2p = 1 ~ p = 1/2.
t
Thus xp = ~ + ~ t 2 + 1:t + 2 + e2t . The complete solution is x(t) = xe(t) + xp(t)
Y
i.e. x(t) = (A1 + A2t)e2t + ~ + ~ t 2 + t + 2 + e2t . t
26

2. Inverse Operator Method.

The non-homogenous ODE can be written symbolically as in (2.37), as

L(D)x = g(t).

The particular integral xp can then be found as

1
xp = L(D) g(t)

where dD) is the inverse differential operator which is interpreted as an integration,

i.e.
L(~) g(t) == f g(t) dt.
For example, the first order ODE of (2.13) can be written as

± + ax = g(t)
(D + a)x == L(D)x = g(t)
1 1
xp = L(D) g(t) == D + a g(t)

the solution of which, as given in (2.16) (with a(t) = a, a constant), is

x(t) = Ae- at + e- at f eatg(t) dt == Xc + xp (2.16)

i.e.

For the second order ODE

X +ob± + ex = g(t)
L(D) == (D2 + bD + e)x = g(t)
which can be factored out to read

(D - Al)(D - A2)X = g(t)

where AI, A2 are the roots of e(A) where e(A) == A2 + bA + e = (A - Ad(A - A2) = o.
Repeated integration gives
 27

Similarly the particular integral of higher order equations is obtained by repeated

integration. Thus, for
L{D)x == (aoDn + alD n- l + ... + an-lD + an)x = g(t)
repeated integration, as carried out above, gives
xp{t) = e.\lt j e('\l-.\d t ! e('\3-'\l)t ... j e-.\"tg{t) {dt)n
Example 2.16. x - 5± + 6x == (D2 - 5D + 6)x = et •
The roots of C{A) = A2 - 5A + 6 = (A - 2)(A - 3) = 0 are Al = 2; A2 = 3 and xp
IS

xp = e2t j e(3-2)t{j e- 3t et dt) dt = ~ et

== e3t j e(2-3)t{j e- 2t et dt)dt = ~et.
The complete solution is
1
x{t) = xc(t) + xp{t) = Ale2t + A2e3t + 2 et .
This can be verified by substituting into the original equation (LHS) = xp - 5±p +
6xp = ~ et{l - 5 + 6) = et = (RHS).
This method of inverse operator is particularly useful when g{t) = eat and
L{D) = L{a) "10 i.e. a is not a root of C{A) = O.
This can be seen, by noting that when g{t) = ue ot where u is a constant, set
equal to 1 for convenience, we have
L{D)eot = L{a)eot
by the definition of L{a), as follows
d
Deot == dt eat = ae at
D2eat = a 2eat etc ...

Then L{D)x = L{a)x = g{t)

1
xp = L(a) g(t) (L{a) "I 0).

When u = u(t), any function of time, we have, instead

L(D)(ueat ) = eat L{D + a)u
where L{D + a), is obtained by replacing D by D + a in L{D)
L{D + a) == ao(D + a)n + al (D + at- l + ... + an
== ao{D + a - Al)(D + a - A2) ... (D + a - An)
where Ai is root i of the characteristic equation C{A) = O.
28

Example 2.17. x + 2x == (D + 2)x = 3e4t

L(D) == D + 2 = L(a) = 4 + 2
d(t) 3e4t 1 4t
xp = L(a) = ""6 = 2 e .
Note that this can always be checked. Thus xp = 2e4t • Substituting
2e4t + 2ie4t = 3e4t (RHS)

Example 2.18. Ii - 5x + 6x == et
or L(D) == (D2 - 5D + 6) = 1 - 5 + 6 == L(a) since a = 1 in this example
(g(t) == et = eat).
g(t) g(t) et
xp = L(D) = L(a) = 2'
This is example 2.15 using the inverse operator method. It is easy to check this
result.
Note that L(a) '" 0 i.e. a must not be equal to any root of the characteristic
equation c(>.) = 0, otherwise L(a) = 0 and this method would involve division by
zero. For example, if g(t) in this example is g(t) = e2t then L(D) = L(a) = 0, since
c(>.) = >.2 - 5>' + 6 = (>. - 2) (>. - 3) = 0 i.e. >'1 = 2 = a. In this case using repeated
integration gives

xp = e2t [e(3-2)t (j e-3t e2t dt) dt

= e2t j e (_e- t) dt = _te2t
t

and the complete solution is

x(t) = Ale2t + A 2e3t - te 2t .

It is easy to check that for xp = _te2t ,

(LHS) = Ii - 5x + 6x = e2t (_4 - 4t + 5 + lOt - 6t) = e2t = (RHS).

The method of finding particular integrals by inverse operator is facilitated by

use of Tables, available in most text books on differential equations. For example,
for L(D)x = d(t), we have xp = tl2) .
Rules for Inverse Operators
Expression Value
1. L/D) eat ;,~) (L(a) '" 0)
(2.51)
2• 1
(D-a)m e
at mr m=,1 2, ... , )
tmeGt (

3. D:I~a2 sin bt :J~~ (a", b)

etc ....
Source W. Kaplan (1958, p. 165-166) (where the table gives 21 functions).
 29

3. Laplace Transform Method.

This consists in taking the Laplace transform of the differential equation, solving
it and using the inverse transform to get back to the original unit. This method
has the advantage of solving, not only the particular integral (xp(t)) but also the
complementary function (xc(t)) in the process.
Although a treatment of Laplace transform would carry us too far away from
the main theme, this can nevertheless be briefly, very briefly indeed, introduced and
its role in the solution of ODE be shown.
The Laplace transform of any function f(t) is defined as

T[J(t)] == F(s) == 1000 e- st f(t) dt (2.52)

where s > 0 to ensure the convergence of the integral. Some of the more commonly
encountered are f(t) = (1, t, tn, eat). Carrying out the calculation, frequently using
integration by parts and partial fraction, gives

(i) T(l) = F(s) = 1o e-stedt = _e-st

00 1
s
100
0
=-1
s

(2.53)

es-a) 100 1
(iv) T(e at ) = F(s) == 10o 00
e-steat dt = - - - = - - (s > a).
s-a o s-a

Laplace transforms, being integrals, are linear, i.e.

i.e. the Laplace transform of a sum is a sum of the transforms of individual functions.
The inverse transform of F(s), designated by T-l[F(s)] is a function f(t) such
that L[J(t)] = F(s). For example T-l(l/s) = 1 since T(l) = l/s T-l(1/s 2 ) = t
since T(t) = 1/s2 etc ...
Our interest in Laplace transform in this context lies in its application to the
solution of O.D.E.
30

Example 2.19. i; + x == Dx + x = e- t , .to = 5.

Taking the Laplace transform of both sides, remembering its the linearity, gives

T[Dx + x] = T(Dx) + T(x) = T(e- t )

8x-5+x= 1/(8+1)
where x is the Laplace transform of x(t). This gives
1 5
x= +--
(8 + 1)2 8 + 1
whose inverse transform, by (ii) and (iv) above, is

x(t) = te- t + 5e- t

which is precisely what we want. Thus, Laplace transform solves the ODE for both
xc(t) and xp(t) in one step.
It is easy to verify that

(LHS) Dx + x = (-te- t + e- t - 5e- t ) + te- t + 5e- t = e- t (RHS).

Note that the above steps are greatly facilitated in practice by use of Laplace
transform tables, available in most text books on O.D.E.

Example 2.20. x - x == (D2 -1}x = 0; Xo = 5; Xo = l.

Taking Laplace transform on both sides, gives

T(D 2x) - T(x) = 0

T(D 2x) = 82X - 8Xo - x~ = 82X - 58 - 1
T(x) == X
2
T(D x) - T(x) = 82X - X = 1 + 58
giving x = (8+ 11tts_l) S:1 s!1 by partial fraction. The solution is given by taking
= +
the inverse transform, i.e.

x(t} = T- 1 C: + 8! J
1 = 2et + 3e- t .

.
Example 2.21. x - Ax, Xo = ( 1) -1 ; A == [3 -2]
4 -1 .

Writing x for the Laplace transform, as usual, i.e. x ==

gives
8Xl - 1 = 3Xl + 2X2
8X2 + 1 = 4Xl - X2
or
 31

[ 8 ~43 8 ! 1] [ :~ ] = [ _ ~]
or (81 - A)x = Xo whose solution for x is, by matrix inversion (see Ch. 4)

__ [ Xl ] _
X = X2
1
- 82 _ 28 + 5
[8-8 ++ 37 ] =_ (81 - A )-1 Xo

1.e.

8+38+3
Xl = == -:----:-::-~
82 - 28 + 5 (8 - 1)2 + 4
-8+7
X2 = .
82 - 28 + 5
Taking the inverse transform, by use of Table, gives

-1 ( 8 + 3 )
X1(t) = T 82 _ 28 + 5
= et cos2t + 2et sin 2t = et(cos 2t + 2 sin2t)
( -1 ( 8 +7 )
X2 t) = T 82 _ 28 + 5
= _e t cos2t + 3et sin 2t = et(-cos2t + 3sin2t)

Note that if the initial conditions are zero, i.e. Xo = ( ~) we have (81 -A)x = 0,
i.e. 8 is the eigenvalue of A, and X == (X1,X2)' is the corresponding eigenvector.
(See Ch. 4). Thus det(81 - A) = 0 => 8 = 1 ± 2i.

2.3. Higher Order Linear Differential Equations

With Constant Coefficients

The treatment of the case of second order differential equations could be extended
to the nth order (n > 2) in a natural way.
Consider a typical nth order linear differential equation with constant coefficients

(2.54)

with ao :F 0 and Dr == d'" jdtr(r = 0,1, ... , n with DO == 1) and the associated
characteristic equation

(2.55)

This polynomial function of order n has n roots which could be

32

(i) all real and simple (i.e. distinct);

(ii) all real and some repeated k times (i.e. real and of multiplicity k) (see Ch. 4);
(iii) some real and some complex but simple (i.e. complex but distinct pairs); and
(iv) some real and some complex repeated h times i.e. complex with multiplicity h
(see Ch. 4).
The above Theorem will be extended as follows:

Theorem 2.6. Let the nth order differential equation be

and the associated characteristic equation C(A} be

C(A} = aOA n + alA n - 1 + ... + an = 0 (2.57)

n
C(A} = E (A - Ar) = o. (2.58)
I

If we associate a function Xr = Xr(A r} to each root Ar(r = 1,2, ... , n}, then the
solution is a linear combination of Xr, i.e. the solution is

(2.59)

where CI, C2, ... , Cn are arbitrary constants to be determined by initial conditions and
thexr(A r} are
(i) e~rt for each simple real root Ar of C(A} = 0
(ii) e~rt, te~rt, t 2e>'rt, . .. , tk-Ie~rt for each root Ar of multiplicity k > 1,
(iii) eOrt cos /3rt and e Ort sin /3rt for each simple (non-repeated) pair of complex roots
Ar = Or ± i/3r

(iv) eOotcos/3st, teootcos/3st, . .. th-1eootcos/3st

eOot sin/3st, te oot sin/3st, ... , th-1eoot sin/3st
for each pair of complex roots As = Os ± i/3s of multiplicity h (h > 1).

Thus theorem 2.5 emerges as a special case of this theorem. For a formal proof,
see any text books on differential equations, for example, Coddington and Levinson
(1955), Maxwell, book 4 (1968) Kaplan (1958).

Example 2.22. L(D}x == (D4 - 8D 2 + 16}x = O.

C(A) = A4 - 8A + 16 = (A - 2}2(A + 2}2. This is case (ii), where Al = 2 and
A2 = -2 having each multiplicity 2. The solution is
 33

Example 2.23. x -3x + 73; - 5x = 0

C{A) = A3 - 3A2 + 7A - 5 = 0 gives A = (I, 1 ± 2i).

This is the combination of case (i) and (iii). The solution is

x{t) = clet + et {c2e2it + C>.!e- 2it )

== clet + et{c2cos2t + C3 sin 2t).

Example 2.24. L{D)x == {D6 + 2Ds + 4D4 + 4D3 + 5D2 + 2D + 2)x = 0

gives A = (±i, ±i, -1 ± i) i.e. one simple pair of complex roots -1 ± i and one pair
of complex roots of multiplicity 2. This is case (iv). The solution, by (iv), is

Example 2.25. L(D)x == (D5 + 2Da + D)x = 0

This is case (i) and (iv) combined. The solution is

x(t) = Cl + C2 cos t + C3 sin t + C4t cos t + cst sin t

2.4. Stability Conditions

It can be seen that if All A2 < 0 in case (i) and A < 0 in case (ii), then as t ~ 00,
A1e'\lt + A 2e'\2 t ~ 0 and x(t) ~ dlc, i.e. limHoo x(t) = dlc: the system is by
definition, stable. Note that this is called asymptotically stable. For case (iii)
Bl cos fJt, B2 sin fJt and A cos(fJt + t") are all circular functions which fluctuate end-
lessly with period 271"1 fJ and amplitude B 1, B2 and A respectively. On multiplication
by eQt , these fluctuations are damped over time if a: < 0, magnified if a: > O. Hence,
for all cases the stability conditions are simply a: < O. But a: is the real part of the
eigenvalue, A = a: ± ifJ, this amounts to saying that Re(A) < O.
Of course, for the case of real A, fJ = 0 i.e. A = a: ± ifJ = a: + 0, and thus the
rule for all cases is simply Re(A) < 0 where Re(A) = a: in the case of complex root
A = a: ± ifJ and Re(A) = A, the root itself, in the case of real root A.
34

2.5. Some Economic Applications

1. The IS-LM Model of the Economy.

Consider a simple closed economy in which national income (Y) rises in response
to excess aggregate demand (D) and interest (r) rises in response to excess money
demand L(Y), i.e. Y = h(D - S) and r = m(L(Y) - M). Aggregate demand
(D) is consumption (G) and investment (I) both assumed to be linear functions i.e.
G = cY(O < c < 1) and I = -ar where c, a > o. Aggregate supply S is national
output, i.e. S = Y. Money demand is assumed to be a linear increasing function of
income, L(Y) = kY (k > 0), i.e. money is demanded for transactions purposes only,
in the spirit of Fisher's quantity theory of money which was subsequently developed
by the Cambridge School as represented by Marshall and Pigou. Money supply (M)
is assumed to be undertaken by the Central Bank. Defining the marginal property
to save (s) to be s == 1 - c, and setting the constant speeds of adjustment hand m
at 1, i.e. h = 1 = m for simplicity, we can describe the economy as

Y = h(D - Y) = -sY - ar (h = 1, s, d > 0)

r = m[L(Y) - M] = kY - M (m = 1, k > 0).
Differentiating the first equation and substituting the second to it

Y = -sY - ar = -sY - a(kY - M)

or
Y + sY + akY = aM
the solution of which, by, (2.44) is

Y(t) = M + Ale.\l + A 2 e.\2 t

k

where C(A) == A2 + SA + o:k = (A - At}(A - A2) = 0 i.e.

1
A = 2" (-s ± v's2 - 4ak).

The stability of the model depends on whether the discriminant ~ == s2 - 4ak ~ O.

<
If S2 > 4ak, Al and A2 are both real and distinct. If s2 = 4ak, Al = A2 = A, a
repeated root; and if s2 < 4ak, the model is periodically stable, as can be seen by
the solution
Y (t) = ~ + e- stj2 (BI sin (Jt + B2 cos (Jt)
where (J == ~ v'40:k - S2 i.e. A = 0: ± i(J == -s/2 ± ~v'40:k - s2 , i = yCI.
 35

2. A Continuous Multiplier-Accelerator Model.

Consider an economy in which national income (Y) rises in response to excess

aggregate demand (X) and capital accumulation speeds up in response to the short-
fall of actual investme~t (I) from its desired level 1* where 1* = vY, v being
the accelerator. Aggregate demand (X) is consumption (C) plus investment (I)
(C = (1 - s)Y + Co where 0 < s < 1). This gives
j = k(I" - I) = k(vY - I) (2.60)
Y = k(X - Y) = h[(1- s)Y + I + Co - Y] = h(-sY + I + Co) (2.61)

Setting k = 1 = h for simplicity and re-arranging

1= Y +sY-Co (2.62)

differentiating,
j=Y+s¥. (2.63)
Equating (2.63) to (2.60) gives, on substitution for I from (2.62)

Y+s¥ =v¥-I
or
Y + (1 + s - v)Y + sY = Co. (2.64)
The solution of which, by (2.38) is
Y(t) = s-lCo + A1e.\lt + A 2 e.\2 t

where .\ = ~ (-I - s + v ± V{I +s - v)2 - 4s).

The three cases where ~ == (1 + s - v)2 - 4s ~ 0 can then be examined and the
<
analysis carried out stability requires Re(.\) < O. The role of the multiplier 1/ sand
accelerator v in .\ hence in the determination of the stability of the model is thus
obvious.

3. Stabilization Policies.

The fluctuations of the economy can be brought under control by varying the
level of government expenditure (G) every time this falls short of some desired level
(G*), i.e.
G = fl(G· - G)
or

(D + fl)C = flC·
C = _fl_G*
D+fl
36

where 13 is some positive constant speeds of adjustment and D == d/ dt is the differ-

ential operator.
Phillips (1954, see also Allen 1960, 1967) distinguished three types of G*
(i) Gi == ,(Y - Y) = -,Y : as national income (Y) falls below some "desired" level
Y (set equal to zero for simplicity). Government demand is in proportion of this
"deficit" ;
(ii) G; == -, f~ Y dr: Government expenditure is proportional to the commulative
deficit of output below some desired level Y(Y = 0 again);
(iii) G; = -,Y i.e. Government expenditure rises when national income falls.
National income (Y) responds to the excess of aggregate demand (X) over
aggregate supply (Y) as usual, i.e.

Y= h(X - Y)

or
h
Y= D+hX
where X = (1 - s)Y + G + eo(O < s < 1) = eo a constant) this gives

Y = D: h X = D: h [(1 - s)Y - D ~ 13 G* + eo].

Multiplying both sides by (D + h)(D + (3) gives (D + (3)(D + h)Y =
h(1 - s)(D + (3)Y + hf3G* + (D + (3)eo. Multiplying out, and remembering that
Deo == Co = 0, gives

[D2 + (13 + hs)D + f3h]Y = hf3G* + I3eo

(i) For case (i) where G* = Gi = -,Y, this is

[D2 + (13 + hs)D + f3h(1 + ,)]Y = I3eo
or
(y + bY + cY = I3eo); b == 13 + hs; c == f3h(1 + ,).
The solution of which, by (2.38) is

Y(t) = eo/h(1 + ,) + A1e'xlt + A 2e'x2 t

where A == ~(-b ± ../b2 - 4c)
(ii) G* == G; = - , f~ Ydr, substitution gives

[D2 + (13 + hs)D + f3h]Y = -hf3,l Y dr + I3eo·

Differentiation gives

[D 3 + (13 + hs)D2 + f3hD + hf3,]Y = I3eo

 37

the solution of which is, by (2.60),

Y(t) = eo/h7 + Ale~lt + A2e~2t + A3e~3t

(iii) G* == G; = 7Y, gives, on substitution,

[D2 + (f3 + hs + hf37)D + f3h]Y = f3eo.

The solution of which, by (2.38), is

Y(t) = eo/h + Ale~lt + A2e~2t

where A == U-(f3 + hs + hf37) ± V(B + hs + hf37)2 - 4f3h)].

The analysis can then be carried out further for the real, repeated and complex
roots cases separately, examining stability in each case and plotting the "corrected"
time paths of national income (Y) in each case, for the various sets of parameters.
This shall not be carried out here: our purpose being to provide some economic
applications of ODE. For further details, see Phillips (1954).

4. Equilibrium Models With Stock.

The Walrasian tatonnement model where price rises in response to excess demand
overlooks the role of stock in the equilibrium price movement, either because all
goods are assumed perishable or goods at different dates and locations are considered
to be different goods, a. la Debreu (1952). When stock plays an important role in
pricing, it must be modelled explicitly.
Consider the case where merchants raise price (P) as his stock (Q) decreases to
some critical level (Q), i.e.

p = -k(Q - Q)(k > 0)

where Q(t) == Qo + fci (S - D)dr =cumulative excess demand

D= 0 + f3p: linear demand function

S = 7 + op: linear supply function.

Differentiating
p = -kQ = -k(S - D)
or
p + k(o - f3)p + k(o - 7).
The solution of which, by (2.38) is

p(t) = b- 0)/(0 - f3) + Ale~lt + A2e~2t

38

where .\ = ±Jk((3 - 8) which is a saddle point .\1 < 0 < .\2 if 8 < (3 and a complex
root if (3 < 8. In this case

p(t) = (r - a)/(8 - (3) + B1 coswt + B 2 sinwt

where w == ..jk(8 - (3). Thus price is unstable in both cases.

2.6. Conclusion

This chapter was devoted to a brief and yet fairly comprehensive review of the
theory of ODE of first and higher order. It is bound to be selective: only those parts
of ODE which will be needed in later chapters were treated. Examples and some
selective economic applications were provided. This selection is rather difficult since
ODE are commonly used in almost every field of Economics. It is hoped that this
review of ODE provides a useful background and a handy reference for use in later
chapters.
Chapter 3
Review of Difference Equations

3.1. Introduction

In Chapter 2, we discussed ODE which involve a variable x(t) and its derivatives X, X,
x which give continuous rates of change. In this chapter, we are dealing with Difference
Equations (d.e.) involving a variable Xt and its differences ~Xt, ~2Xt etc .... The variable
in question varies discretely, or more correctly, although it changes continuously, the
observations of these changes are made and recorded only at intervals. For example, if Xt
is gross national product at time t, it is measured only once a year, say on 31 December and
recorded on that day. They are called difference equations since they involve differences
in functions. For example, if Xt = f(t) the first difference is
~Xt = Xt+! - Xt = f(t + 1) - f(t)
~Xt+! = Xt+2 - Xt+! = f(t + 2) - f(t + 1)
the second difference is

~2Xt == ~Xt+! - ~Xt = (Xt+2 - Xt+!) - (Xt+! - Xt)

= Xt+2 - 2Xt+! + Xt (3.1)

For simplicity, it will be assumed that observations are made at regular intervals, i.e. t is
equally spaced. Also we shall write Xt, Xt+! etc. instead of x(t) and x(t + 1) for notational
simplicity and also for distinction with ODE.
This chapter will be devoted to a brief treatment of first, second and higher order
d.e. Since the parallel with ODE in Chapter 2 is almost complete - the only difference
being in the discrete time variable - the treatment will be brief. Furthermore, we shall
concentrate on the cases of constant coefficient first and second order d.e.
Definition 3.1. Ordinary Difference Equations (henceforth called Difference Equations
for short, and abbreviated to d.e., in contradistinction with ODE, Ordinary Differential
Equations in Chapter 2) are equations involving one variable Xt measured discretely at
different times. For example,

F(Xt+b Xt, Xt-b" .) =0 (3.2)

or explicitly

Xt+l = f(xt, Xt-l,·· .). (3.2')

The order of the d.e. is given by the highest difference appearing in the equation. For
example

is a second order linear d.e.

40

Definition 3.2. By solution of a d.e. is meant all values of Xt not involving differences
and satisfying (3.2).
It could be proved that if xc(t) is a solution of (3.2), so is kxc(t) for any arbitrary
constant k; and also if xc(t) and xp(t) are solutions of (3.2), so are their linear combinations
kIXc(t)+k2Xp(t) for any constants kl and k2. Similarly, it could be proved that the solution
exists and is unique.
Finally, note that the solution of a d.e. of order n requires n initial conditions in order
to quantize the n arbitrary constants which appear in the solution.
We shall discuss first, second and higher order d.e. their stability, and provide some
economic applications.

3.2. First Order Difference Equations

3.2.1. Linear Difference Equations

A typical first order linear d.e. is of the form

= aXt; x(O) = Xo (homogeneous)

Xt+l (3.3)
= aXt + b, x(O) = Xo (non-homogeneous)
Xt+! (3.4)
where Xo is the given value of Xt at t = 0, called initial conditions.

Theorem 3.1. The solution of the homogeneous d.e. (3.3) is

(3.5)

Proof. By iteration,

Xl = axo
X2 = aXI = a(axo) = a2xo

Hence, for any t, Xt = atxo. (QED)

Theorem 3.2. The solution of the first order non-homogeneous d.e. (3.4) is

b
xt=atc+- 1 --a ifa#l
Xt = Xo + bt if a = 1

where C == Xo - b/(l- a).

 41

Proof. Again by iteration

tXt+! = aXt + b
o Xl = axo + b
1 X2 = aXl + b = a(axo + b) + b
2 Xa = aX2 + b = a3xo + (1 + a + a2)b

n -1 Xn = anx + 0 + (1 + a + a 2 + ... + an-l)b

=anxo + I-aft
I-a
b = an (X 0 _ _I-a
b_) + _b_
I-a

Since 1 + a + a 2+ ... + a n - l = li~a: being a geometric series. Hence for any t

Xt = at (xo - _b_)
I-a
+ -1
b
-a
(a ~ 1).
If a = 1, Xn = anxo+bn 2:0- 1 ai = xo+bn for a = 1. Hence Xt = xo+bt if a = 1. (QED)
Remark 3.1. The homogeneous case (3.5) emerges as a special case of (3.6) where b = 0;
and if a = 1, b = 0, Xt = atxo = Xo.
Remark 3.2. Like the ODE, the solution (3.6) has two parts, xc(t) and Xe. The first one,
xc(t) == ate == at(xo - b/(l- a)) = at(xo - x e) is called the complementary function which
is the solution to the homogeneous part Xt+l - aXt = 0 and xp == Xe = b/(l - a), called
particular integral (xp) or equilibrium (xe), which is the particular value of Xt that fits
the given equation (3.4). Xe indicates the "equilibrium" value of Xt, since by definition,
Xt is the same for different t i.e. Xt+! = Xt = Xt-l = Xe in equilibrium. Using this in (3.4)
gives Xe = aXe + b i.e. Xe = b/(l - a) (a ~ 1). xc(t) indicates the deviation at time t, of
Xt from its equilibrium Xe. (See figure 3.1) for the case of 0 < a < 1).

Xc (0 < a < 1)

x. f - - - - - - - - - - - b / ( l - a) = x.

Figure 3.1. Xt = at[xo - b/(l - a)] + b/(l - a)

Remark 3.3. In the light of Remark 3.2 and of our knowledge of the solution (3.6), we
may just as well start the solution process by trying the solution xc(t) = c>..t where c is an
arbitrary constant and ). is as yet undetermined, for the homogeneous part. This gives
c).t+! - ca).t = 0 i.e. c>.t(). - a) = 0 giving). = a and thus xc(t) = c).t = cat. For a given
Xo, we have at t = 0,

X(O) = Xo = cao + b/(l - a) = c + b/(l - a)

42

i.e.
c = Xo - b/(l - a)
which indicates the initial deviation of Xo from its equilibrium value b/(l- a). (See figure
3.1).

=
Remark 3.4. If lal < 1 i.e. -1 < a < 1, limHoo at 0 giving liffit-too Xt 0 + b/(l- a): =
the system is stable in that Xt will converge to its equilibrium value Xe overtime (see figure
3.1). If lal > 1 i.e. a < -lor 1 < a, liffit-too at = ±oo: the system is unstable.

Example 3.1.
Xt+l = 0.5xt + 2, Xo = 10.
The solution, by (3.6) is

Xt = (0.5)t(xo - Xe) + Xe
= (0.5)t(10 - 4) + 4
o < a = .5 < 1 : the system is stable since Xt -t 4 over time.

3.2.2. Non-Linear Difference Equations and Phase Diagram

A non-linear first order d.e. is of the form

(3.8

The exact form of f need not be known: so long as some properties concerning it:
slope, curvature (convex or concave), behaviour at Xt = 0 and Xt = 00 are given, th,
equation is solvable qualitatively by use of phase diagrams. This consists of drawinJ
a 45°-line (Xt+l = xd in the Xt+lXt plane and look for the fixed point at which f(xt
intersects this line, then examine its stability. (See figure 3.2).

XI+l

Xl

X2
f(xt}
.
45° :
XI XI
0 Xo Xl

Figure 3.2. Xt+l = f(xt)

 43

Starting from an arbitrary x(O) = Xo, f(xt) allows us to read Xl = f(xo). The 45°-line
then translates Xl for t = 1 from the vertical to the horizontal axis where Xl is now
taken as the new initial condition for t = 1. X2 = f(Xl) then gives X2 for t = 2 and so
on. Equilibrium, or the graphical or qualitative solution is the fixed point, if this exists,
where f(xt) intersects the 45°-line i.e. where Xt+l = Xt. It is easy to see that, provided
the solution (i.e. the fixed point) exists, stability conditions are If'l < 1. In the linear
case, f' = a and hence lal < 1 is the stability condition (see Remark 3.4). Clearly the
existence of the solution depends on whether f(xt) intersects the 45°-line. In figure 3.2,
it is easy to see that if 1f'1 > 1, the system is unstable: Xt moves away from the 45°-line
as time goes on.

3.2.3. Some Economic Applications

1. The Cobweb Cycle.

Consider the supply St and demand function D t for a commodity

Dt = a + /3Pt
St = / + 8pt-l
where a, /3, /, 8 are constants. While demand D t is a function of current price Pt, supply
St is a function of price prevailing on the market at some previous period, Pt-b due to
production lag. Equilibrium takes place when D t = St i.e. when

(3Pt = / - a + 8pt-l; p(O) = Po

or, defining a == 8//3, b == b- a)//3, we have

Pt = apt-l + b, p(O) = Po·

This is a first order d.e. whose solution, by (3.6) is

Pt = at[Po - b/(l- a)] + b/(l- a).

P P

Po
PI
S

:~DI"I<l
Po
PI
.~S~I>l
.....
D
D,S D,S
0 0
44
p p
p

I--+--+---'p'----P. I---t-+-+-+--p.
lal < 1 lal > 1
o o

Figure 3.3. Pt = at(Po - P.) + P.

Stability conditions require lal < 1 which is always satisfied if S is flatter than D i.e. if
lal == 16/.81 < 1, where 6 and .8 are, of course, the slope of the supply and demand curves
respectively. It can be seen, from figure 3.3 that, starting from some Po at t = 0, price will
fluctuate around its equilibrium level P. = b/(1 - a) to which it will converge if lal < 1
and from which it will diverge if lal > 1. On the price-quantity diagrams, this looks like
a convergent and divergent cobweb, hence its name.

2. The Dynamic Multiplier Model.

In a Keynesian economy where all investment 7t is autonomous (7) and current

consumption C t is a linear increasing function of the income Yi-I received in the pre-
vious period, i.e.

Ct = cYi-I + Co
It = 7
Yi = Ct + It = CYi-I + Co + 7.
The solution, by (3.6) is

where Ye == Y" = ~ .
Stability conditions require lei < 1. Since 0 < c =MPC we have 0 < c < 1. Thm
given the constant c and Co, even if we do not assume 0 < c < 1 to start with we CaIl
still use Samuelson's (1947) Correspondence Principle to conclude that an increase ir
investment will cause equilibrium national income (Ye) to increase by the static multipliel
effect 1/(1 - c) if the corresponding dynamic model is to be stable, i.e. if 0 < c < 1.

3. The Overlapping Generations Model.

The overlapping generations model of Allais (1947) Samuelson (1958) and Diamoll(
(1965) has been widely applied. It will be presented here as an application of non-linea:
first order d.e. In this model, individuals live two periods, work in the first for an incoml
 45

Wt and retire on their saving{s} in the second. Goods do not keep and thus generations
trade with one another. Compared with Ramsey's {1928} model, it arrived at different
results: competitive equilibrium is different from planners' equilibrium, and may not be
Pareto optimal in that people oversave.
Let there be Nt people born at time t, each working in period t, consuming Cit when
he works and C2,t+l when he retires, next period. Population grows at a constant rate n
i.e. Nt = N o{1 + n}t. .
A typical individual derives utility from his consumption in both periods i.e.

{3.9}

where 0 is a constant positive rate of future discount.

The economy produces with a constant returns technology

Y = F{K,N} = NF(K/N,N} == Nf{k} {3.1O}

where F is homogeneous of degree one in capital {K} and labour {N} and
k == K/N =capital per worker. Output per worker is F{K/N,N} == f{k} with
f" <0 < /'.
A typical individual born at t maximizes

{3.11}

subject to CIt = Wt - St {current consumption} {3.12}

C2,t+1 = {I + rt+1}st {retirement consumption}
where St : saving at t and rt = interest rate at t.
The first order conditions, obtained by differentiating with respect to CIt and C2t the
Lagrange equation V = U + '\t (Wt - CIt - t~';;:,) and rearranging

(3.13)

whose solution, by the implicit function theorem, gives the saving as a function of income
(Wt) and price: interest rate (rt+1) being the price at which present goods are exchanged
for future goods, i.e.
{3.14}
with
Sw(== as/aWt} > 0 and Sr ~ o.
Firms maximize profit by observing marginal conditions, i.e. by equating marginal
product of labour with wage (wd and marginal product of capital with interest rate (rt)
1.e.
f(k t ) - kd'(k t } = Wt (3.15)
!' (kt ) = rt·
Market equilibrium requires investment Kt+1 - K t to be equal to the saving
Nts( Wt, rt+1} of the young net of the dissaving of the old K t , i.e.
(3.16)
46

or in per-capita terms, after eliminating K t from both sides,

(3.17)

Substituting Wt and rt+1 by the marginal conditions (3.15)

kt+1 = _1_ s[J{kt)-kd'(kt ), !'(kt+1)] == 'I/J(kt ) (3.17a)

1+n
dkt+1 = 'I/J'(k t ) = -sw{kt)ktJ"(kt ) . (3.18)
dkt 1 + n - sr(kt+l )!"{kt+1)
Clearly the numerator is positive since f" < 0 < Sw but the denominator could be of
either sign in view of the ambiguity Sr ~ 0: an increase in interest rate may cause saving
to increase or decrease. If Sr > 0 then 'I/J'{k t ) > o.
The Solution (qualitative) is given by the fixed point where kt+1 = 'I/J{k t ) intersects
the 45°-line, i.e. when kt+1 = kt = k*. In view of the non-linearity of (3.17a), stability
depends on whether the slope of 'I/J(kd at the fixed point k*, is less than unity in absolute
value, i.e.
' k* )1-
= I -s w k*f"(k·) I< 1. (3.19)
I'I/J( l+n-srf"(k*)
There is only one equilibrium if 'I/J(O) = 0, 'I/J'(O) = 00 and 'I/J" < 0 < 'l/I everywhere, more
than one equilibrium if 'I/J{kt} intersects the 45°-line more than once, say at x*, x** and
x···. For example if 0 < 'I/J'(x·), 'I/J' (x***) < 1 < 'I/J'{x**) then x·* is an unstable equilibrium
sandwiched between two stable equilibria x· and x·**.

3.3. Second Order Linear Difference Equations

The typical form of this second order d.e. is

aXt + bXt-l + CXt-2 = g(t) given x(O) = Xo and x(1) = Xl. (3.20)

If g(t) = 0, (3.20) is called a homogeneous d.e. or the reduced form of d.e. whose solutio[
is called the complementary function xc(t). If g(t) =j:. 0, it is a non-homogeneous d.e. Th{
particular integral (x p ) or equilibrium solution (xe) is the particular value of Xt which fit~
g(t) in (3.20).

3.3.1. Particular Integral

1. Consider the case where g(t) = d, some constant, in (3.20). The particular solutiO!
is obtained by trying a solution x = kti where k is a constant and i = 0,1,2: i = (
if a + b + C =j:. 0 in (3.20); i = 1 if a + b + C = 0 and i = 2 if b + 2c = O.
 47

Case {i}. If a + b + e ¥- 0, i = 0, the trial solution XI = k'Vl applied to (3.20) gives

ak + bk + ek = d => k = d/(a + b + e) giving the particular integral xp == Xe = k =
d/(a+b+e).
Case {ii}. If a + b + e = 0 (i.e. i = 1), trying XI = kt and substituting into (3.20)
gives
akt + bk(t - 1) + ek(t - 2) = d
(a + b + e)kt - (b + 2e)k = d

k = -(b ~ 2e) i.e. xp = kt = - (b: 2e) t.

Case (iii) If b+2e = 0 and also a+b+e = 0, i = 2 trying XI = kt 2, XI-I = k(t-l)2

etc. gives, on substituting into (3.20), k = d/2e i.e. xp = fct 2.
2. When g(t) is some function of time, for a particular integral, try a function of the
same form. For example if g(t) = em t , try Xt = kmt and substitute into (3.20) as
before. If g(t) = at2 try Xt = at 2 + bt + e and substitute into (3.20). This is similar
to the ODE case of Chapter 2.

3.3.2. The Complementary Function xc(t)

This is the solution of the homogeneous part, or reduced form, of (3.20) with g(t) = 0,
i.e. xc(t) is the solution ofaxt + bXt-1 + eXt_2 = 0 (or aXt+2 + bXt+l + eXt = 0). In the
light of first order d.e., we can try xc(t) = A~t, xc(t + 1) = A~t+l etc ... where A is some
arbitrary constant. Substitution into (3.20), with g(t) = 0, gives
A(a~t + b~t-l + cAt- 2) = A~t-2(a~2 + b~ + e) = O.
Since A~t-2 ¥- 0, the characteristic equation e(~) = a~2 + b~ + e must vanish. This has 2
roots i.e.
(3.21)
gives ~l' ~2 = f,; 2
(-b ± -/b - 4ae) and the complementary function we are searching is
(3.22)
where Al and A2 are two arbitrary constants to be determined by the 2 initial conditions
Xo and Xl. Three cases arise, just like the ODE of chapter 2, as follows:
(i) ~ == b2 - 4ae > 0 : ~l and ~2 are both real and distinct roots of e(~) = O. The solution
is (3.22).
(ii) ~ = b2 - 4ae = 0 : ~l = ~2 = ~ (say) i.e. e(~) = 0 has two identical roots, ~ = "2: .
The solution (3.22) obtained by trying xc(t) = At~t instead, substituting into (3.20) with
g(t) = 0, remembering that b2 = 4ae and ~ = -~, is
(3.23)
48

(iii) .6. < 0, C(A) = 0 gives A = -f,; ± iy'4~,;b2 == 0: ± if3 where 0: == Re(A) = -f,; and
13 == y'4~:-b2 , both real numbers, and if3 = Im(>'). Solution (3.22) is now

(3.24)

In polar coordinates, 0: = r cos 6 and 13 = r sin 6 where 6 is the angle between the real
axis 0: and the radius r (see figure 3.4).

..\ = ct + if3

---;<"iE-ir---+-------ct = Re..\

x= ct - if3

Figure 3.4. >. = 0: ± if3

This gives 0: ± if3 = r (cos 6 ± i sin 6)

(0: ± if3)t = rt (cos 6t'± i sin 6t)

by De Moivre's theorem. Using this form, we have (3.24) as

xc(t) = Alrt(cos6t + isin6t) + A2rt (cos 6t - isin6t)

= rt(Bl cos 6t + B2 sin 6t) (3.25)

where Bl == Al + A2 and B2 == i(Al - A 2), just as in Chapter 2. Note that

(0: + if3)( 0: - if3) = >.X = 0: 2 + 132 = r2, i.e. r = ±v'0: 2 + 132 == ±~. Angle 6 can
be calculated from the definitions sin6 = f3/r, cos6 = o:/r, tan6 = sin6/cos 6 = 13/0:
i.e. 6 = sin- l (f3/r) = cos-l(o:/r) = tan- l (f3/o:). This allows the computation of rand 6
in (3.25) to be made.
A further transformation Bl = A COSf, Bl = Asinf and hence·tanf == sinf/cosf =
B2/ Bl or f = tan- l (B2/ B l ) where B}, B2 are defined above, gives us (3:25) in an alter-
native form
(3.26)
which gives amplitude A and period T = 21r /6 (see figure 3.5). A, depending on initial
conditions, fixes the initial amplitude and r = ~ determines whether this amplitude
grows (r > 1) or declines (r < 1) overtime. If r = 1, xc(t) exhibits a regular oscillation of
a constant amplitude over time.
 49

Figure 3.5. Amplitude A and period 211"16 of (3.26)

3.3.3. Complete Solution and Examples

The above discussion could be summarized as follows:

Theorem 3.3. The solution of the second order d.e.

aXt+bXt-l +CXt-2 = get) (3.20)

is
Xt = X. + Al~~ + A2~~ (3.27)
where ~1 and ~2 are the roots of the characteristic equation

and x. == xp = the particular solution discussed in 9.9.1.

Solution {9.27} takes the following form

{i} (3.27)

when ~1 and ~2 are both real and unequal

(ii) (3.28)

where >'1 and ~2 are equal, i.e. >'1 = >'2 = ~ = -bl(2a)

(iii) (3.29)

or
(3.30)

when ~1 and >'2 are the complex roots of c(A) = 0 .i.e. ~2 = XI, or if ~1 == >. then .\2 = X).
50

Example 3.2.
Xt + 4Xt-1 + 3Xt-2 = 8, Xo = 3; Xl = 4
c(,x) = ,X2 + 4'x + 3 = 0 ~ ,X = (-3, -1), case (i) Xe = 8/8 = 1. Solution (3.27) gives

Xt = 1 + AI(-3)t + A2(-lr

At t = 0, Xo = 1 + Al + A2 = 3 (given).
At t = 1, Xl = 1 - 3AI - A2 = 4 (given).
These 2 equations in Al and A2 give (AI, A 2) = (-3,5) and thus the complete solution is

Example 3.3.
Xt + 4Xt-1 + 4Xt-2 = 9, (xo, xd = (2,3)
c(,x) = ,X2 + 4,X + 4 = 0 ~ 'xl = 'x2 = -2 (case(ii)).
The solution, by (3.28) is

Xt = 1 + (AI + A2t)( _2)t

= 1 + (1 + 2t)(-2)t

where (AI, A 2 ) = (1,2) as from initial conditions.

Example 3.4.
Xt+2 - 2Xt+1 + lOXt = 9 (xo, xd = (2,3)
c(,x) = ,X2 - 2,X + 10 = 0 ~ ,x = 1 ± 3i (case (iii))
Xe = 9/9 = 1.

The solution, by (3.29) is

Xt = 1 + rt(BI cos8t + B2 sin8t)

where r = -/0:2 + /3 2 = JfO ~ 3.16 and 8 = tan-l 3 ~ 71.56.

This gives
Xt = 1 + 3.16 t (B I cos 71.56t + B2 sin 71.56t).
At t = 0, Xo = 2 = 1 + BI ~ BI = 1.
At t = 1, Xl = 3 = 1 + (3.16)(.3163) + B 2(3.16}(.9486) = 2 + .9995444 + B2(2.9975) =;
B2 ~ 1/3.
With BI and B2 thus quantized, the solution is

Xt = 1 + 3.16t(cos 71.56t + .333 sin 71.56t}.

In the alternative form (3.30) this is

Xt = 1 + Art cos(8t - f}
= 1 + (1.05)(3.16}t(cos 71.56t - 18.435)

where f = tan-l (B2/ B I } = tan- I (I/3} ~ 18.435 r = 3.16 as before.

 51

3.4. Higher Order Difference Equations

An nth order d.e. (n > 2) is of the form

(3.31)

with n given initial conditions. Without loss of generality, we can set ao = 1 (and of
course an ¥ 0) and g(t) = 0, and obtain an exact parallel of the treatment of ODE in
Chapter 2.
The characteristic equation c('x) is given by
,Xt + al,Xt-l + ... + an,Xt-n
= ,Xt-n(,Xn + al,Xn-l + ... + an) = 0
= ,Xt-nc('x) (3.32)

where c(,X) = ,Xn + al,Xn-l + ... + an, an nth order polynomial whose solution involves n
roots which may be all real and distinct, or complex, or repeated on lines (multiplicity
m, see Chapter 4). The solution for the n distinct real roots is

(3.33)

If some root 'xi is repeated mi times,

(3.34)

If roots are complex but distinct, they come in conjugate pairs and each pair has the form
(3.25)
rt(Bl cos8t + B2 sin8t). (3.35)
If some complex root j is repeated mj times, it is

rj[pj(t) cos8t + Qj(t) sin8t] (3.36)

where Pj(t) == Blj + B2jt + ... + Bm/mj-l

and qj(t) == Glj + G2jt + ... + Gmjtmj-l
where Bij and Gij (i = 1,2, ... , mj) are arbitrary constants.
These are more complicated but conceptually not more difficult than the second-order
d.e. case.

3.5. Stability Conditions

Definition 3.3. An equilibrium point x is stable if every solution starting at a point Xo

close to it, will stay close at all future time. More formally, x is said to be stable if for
e> 0, there exists J(e) > 0 such that

Ixo - xl < J implies IXn - xl < € 'lin > 1 (3.37)

52

3.5.1. Stability of First Order Difference Equations

It will be recalled that the solution of Xt = aXt-l + b, given xo, is Xt = (xo - x.)at + x •.
The model is stable if Xt -+ x. as t -+ 00. For this to happen, lal < 1 i.e. -1 < a < 1.
If 0 < a < 1, i.e. a is a positive fraction, at -+ 0 as t -+ 00 in positive descending steps.
For example if a = ~, at = 1, 1/2, 1/4, 1/16 for t = 0,1,2,3 i.e. 0.5 t tends to zero in
descending steps. (see figure 3.6). If - 1 < a < 0, at overshoots its equilibrium (being
alternatively positive and negative) while approaching it (see figure 3.6). Eg. if a = -1/2,
at = 1, -1/2, 1/4, -1/16 for t = 0,1,2,3. Outside this range (-1,1), i.e. if lal > 1 i.e. if
a < -1 or 1 < a, at will climb up the steps indefinitely, diverging from x. in larger
and larger steps and if a < -1, at will diverge from x. in larger and larger positive and
negative steps (see figure 3.6)

XI Xt x.
XI (xo > x.)
(I < a) (a < -I)
Xo Xo
x. x. x.
Xo
(xo - x. < 0)
XI

0 I<a 0 a< -I

XI XI
Xo (xo > x.) (-I<a<O)
(0 < a < I) Xo x.

x. XI x. x. x.

Xo (xo < x.)

t
0 O<a<1 0 -I < a < 0

Figure 3.6. Xt = (xo - x.)a t + x.

3.5.2. Stability of Second Order Difference Equations

Stability depends on the roots of e('\) = a,\2 + b'\ + e = 0 i.e. on ,\ = _b±~ .

Case (i) ~ == 4ae > 0: two real distinct roots exist and stability requires
b2 - I'\d < 1
(i = 1,2) implying 1'\1'\21 = le/al < 1.
Case (ii) ~ = 0, 1,\1 < 1 since the term ,\t dominates A2t in the solution xc(t) = (Al +
A2t),\t.
 53

Case (iii) ~ < 0, Irl < 1 i.e. -1 < #-

< 1 since rt with Irl < 1 will dampen
the fluctuations caused by the (B1 cosBt + B 2 sinBt) term. Note that we must have
A1A2 = (0 + ifJ)(o - ifJ) = XX = 0 2 + fJ2 = r2 < 1 for stability.

3.5.3. Stability of Higher Order Difference Equations

Consider the nth order d.e.

(3.38)

with the associated characteristic equation C(A)

(3.39)

and the solution, for the case of distinct real roots, is

(3.40)

Stability conditions are IAil < 1 for all i in the real root case and Irl < 1 in the complex
root case.
Schur's theorem (see Chipman 1951) is often used to check these stability conditions.
To use the theorems, write determinant ~n as follows

1 0 0 an an-1 a1
a1 1 0 0

~n =
an-1
an 0
1
0
0
1
0
a1
0 an
a n-1 == I ~~ A2
A'1
I
an-1 0

a1 an 0 0 0 1

Let ~1 be ~n where only the first rows and column of each submatrix Ai are retained,

and ~2 is ~n where only the first two rows and columns of each submatrix Ai (i = 1,2)
are retained, and so on, i.e.

1 0 an a n-1

~1 = 11
an
an
1
I' ~2=
a1
an
1
0
0
1
an
a1
etc ...
a n-1 an 0 1

Schur's theorem says that lAd < 1 for all i iff ~1, ~2' .•• , ~n are all positive.
54

3.6. Economic Applications

Second order d.e. have been widely used in Economics. Suffice to review only two
of them, the Samuelson-Hicks models in view of their importance and their pioneering
character.

3.6.1. Samuelson's (1939) Business Cycle

Samuelson's model is built on the multiplier and accelerator: Current consumption

(Ct ) is a linear increasing function of previous period's income (Yi-d and current invest-
ment (It) rises with rising consumption (Ct - Ct-t}. More precisely

Ct = CYi-l (0 < c < 1)

It = v(Ct - Ct- 1) = cvYi-l - cvYi-2 (v> 0)
G t = 1 (Fixed government expenditure level)
Yi = Ct + It + Gt (national accounting identity).
The two parameters of the model are c = MFC with 1/(1 - c) = multiplier, and the
accelerator v giving the speed of response of It to rising consumption.
Substitution gives a typical second order d.e.

Yi - c(1 + V)Yi-l + cvYi-2 = 1, (Yo, Y1 given) (3.41)

the solution of which is

(3.42)

where Yo == Yp = 1/(1- c) = multiplier = particular integral of Yi and AI, A2 are the roots
of C(A) where

1.e.
A = ~ [C(1 + v) ± Jc2(1 + v)2 - 4CV] . (3.43)

Clearly the two parameters c and v determine A and hence the stabili ty of Yi. Three cases
arise depending on whether the discriminant ~ == ~(1 +v)2 -4cv ~ 0, and in the complex
root case (~ < 0), whether Yi is periodically convergent or divergent. Only the limiting
case ~ = 0 need be examined. Since c > 0, ~ = 0 ::} c(v) = 4v/(1 + V)2, a concave
function over v E (0,2) which reaches a maximum at (c, v) = (1,1). At v = 2, c(v) has an
inflexion point and becomes convex thereafter, i.e. c'(I) = 0, c"( v) = 8( v - 2) /(1 + v)4 and
c"(v) ; 0 for v ; 2. Above this line, roots are real and distinct, indicating monotonically
increasing or decreasing Yi (i.e. no fluctuations) and below it, roots are complex indicating
fluctuations (see figure 3.7).
 55

c CVgt\ dvgt
cv = 1
1=:==.,-:----=::0;:::::--------------- c = 1
monotonic dvg
· (1)

·
periodic: cvg l'
(3) : c(v) = 4v/(1 + v)2
nO~----------~1----------~2~-------------v

Figure 3.7. The parameter vc space

In the complex zone below c( v) = 4v / (1 = V)2 line, stability is given by Ir I = IFvl < 1,
in the solution
(3.44)
Since (c, v) > 0, Irl = 1 =? r = cv = 1 divides the parameter space into a divergence
zone above it and convergence zone below it (see figure 3.7). Since 0 < c < 1, only the
area below c = 1 line is of interest. The two curves cv = 1 and c = 4v/(1 +V)2 delineate
the parameter subspace into 4 zones of interest: monotonic divergence in (1), periodic
divergence (2), periodic convergence (3) and monotonic convergence (4). This completes
the analysis of Samuelson's cycle.

3.6.2. Hicks' (1950) Contribution to the

Theory of Trade Cycle

Hicks' Trade Cycle is, like Samuelson's, based on the interaction of the multiplier (1/ s)
and accelerator (v). It provides an independent and interesting application of the solution
techniques discussed above. Hicks' model is
Ct = (1 - S)Yi-l: Consumption function
It = Ao(l + g)t + V(Yi-l - Yi-2): Investment function
Yt = C t + It: National income.

Consumption C t is a lagged linear function of Yt-l (0 < S < 1, s being the marginal
propensity to save). Investment (It) has two components: autonomous investment
Ao(l + g)t growing exogenously at some constant rate 9 and induced Investment
V(Yt-l - Yt-2) which responds to changes in GNP, v > 0 being the accelerator. Sub-
stitution gives
Yi - (1 - s + V)Yt-l + VYt-2 = Ao(l + g)t (3.45)
The particular solution Yp can be found by trying a solution Y t = kmt, Y t - 1 = kmt-I,
Y t -2 = kmt - 2 (as discussed in 3.3.1, 2) and substituting into (3.45)
km t - (1 - s + v)km t- 1 + vkm t- 2 = Aomt
56

m ' - 2[km 2 - Aom2 - km(1 - s + v) + kv] = 0

k = aOm
2
. (3.46)
m2-(-s+v)m+v

The particular integral is

Y.,(t) == Yp(t) = km t
(Aom 2)m'
= m2 - (1 - s + v)m
~--~~~~----
+v
(3.47)

where m == (1 + g). This gives a "moving equilibrium" income.

The complementary function Yc(t) is

(3.48)

where Al and A2 are the roots of the characteristic equation C{A) = A2_ {1-s+v}A+v = 0
of (3.45), i.e.

(3.49)

Stability depends on the discriminant ~ == (l-s+v)2-4v. Two real distinct roots (Al, A2)
exist when ~ > 0 i.e. when 1 - s + v > 2.jV i.e. (1 - .jV)2 > s :::} (i) 1 - .jV > .jS and
(ii) -1 + .jV> .jS, since (1 - s) and v are both positive. Thus ~ > 0 :::} v < (1 - .jS)2
and (1 + JS)2 < v giving respectively monotonic decreasing and increasing GNP over
time. ~ < 0 for (1 - ..[i)2 < V < (1 + JS)2 where Y, is periodically convergent for
(1 - .jS)2 < V < 1 periodically divergent (unstable) for (1 + JS)2 > V > 1 and Y, exhibits
a constant cycle for v = 1 (see figure 3.8 and 3.9). Figure 3.9 identifies zones of periodic
convergence (p.c.), periodic divergence (p.d.) from monotonic convergence (m.c.) and
monotonic divergence (m.d.) The complete solution is

Y, = Y,,(t) + Y.,(t) (3.50)

where Y,,(t) is given by (3.48) and Y.,(t) by (3.47).

Figure 3.8. Behaviour of Y, for different s and v

 57

ir------.----------;--- s = 1
v = (1- VS)2

(p.d.)

(m.e.) (m.d.)
-L~~--~~~~~~~-------v
o
Figure 3.9. The parameter space

3.7. Concluding Remarks

This chapter was devoted to the treatment of first, second and higher order d.e.,
both linear and non-linear, with some economic examples. It was brief, in view of the
similarities with ODE in Chapter 2. Yet it is comprehensive: it covers all important
points which are useful for the understanding of Dynamical Systems.
Finally, it will be useful to keep clear in mind the differences between the solutions of
ODE and d.e. Take the second order linear case, for definiteness, these are summarized
in the following table.

ODE d.e.
Form of ax + bi: + ex =0 aXt+2 + bXt+1 + eXt = 0
equation (or aXt + bXt_1 + eXt-2 = 0)
e(A) aA 2 + bA + e = 0 aA 2 + bA + e = 0
A = ~ a( -b ± y'b 2 - 4ae ) A = ~ a( -b ± y'b2 - 4ae)
Solution

(i) ~ >0 x(t) = AleA]t + A2e A2t x(t) = AlAi + A2A~

(ii) ~ =0 x(t) = (AI + A2t)e At x(t) = (AI + A2t)N
. (iii) ~ <0 x(t) ;= eat(BI cos f3t + B2 sin f3t) Xt = rt(BI cos 8t + B2 sin 8t)
or x(t) = eatAcos(f3t - E) or Xt = rtAcos(8t - E)

where for case (iii) (~ < 0), A = a ± if3 = Re(A) ± Im(A), r = ;;;;',8 = tan- I (f3/a),
E = tan- 1 (B 2 / Bd. Obvious as these are, they often constitute a source of confusion for
some students.
Chapter 4
Review of Some Linear Algebra

This chapter provides a brief review of some elements of linear algebra which will be
used in later chapters, in the treatment of dynamical systems.
It will soon be clear that in the solution of the dynamic system x = !(x, t) we will
need matrix theory, especially eigenvalues and eigenvectors, both real and complex, to
deal with the linearized part. A brief review of vectors and matrices would provide a
useful reference. The review will be selective and kept to the minimum needed. For
any further materials and any in depth treatment, the readers should consult excellent
textbooks on the subject, some of which are Pedis (1958), Gantmacher (1959), Bellman
(1960), Hadley (1965), Lancaster (1969), Strang (1976), and Anton {1984}.

4.1. Vector and Vector Spaces

Definition 4.1. A vector x = (Xl, X2 , ... , Xn) of dimension n is an ordered set of n scalars
Xi (1 ~ i ~ n) called component of x.
Two vectors of the same dimension are added (or subtracted) by adding the corre-
sponding elements. For example:
X+ Y = (Xl + Yl,'" Xn + Yn).
A vector X is multiplied by a scalar k when each of its components is multiplied by k,
I.e.:
kx = {kXI' kX2,' .. , kXn}.
The multiplication of a column vector X by a row vector y of the same dimension is
called an outer product: it gives a square matrix C, i.e.:

xyT == [
Xl
: 1 [Yl ... Ynl =
[: Cll
...
Cl
n
1== C (4.1)
Xn Cnl Cnn
The multiplication of row X by column y of the same dimension gives a scalar. This
is called scalar product or inner product or dot product. I
n

xT y = (x, y) = X . Y == L XiYi in the real space.

1Note that inner product (x, y) and scalar product x T y are the same in the real space i.e. (x, y) =
(y, x) = x TY = yT X == E XiYi but in the complex space, they are not: (x, y) = E XiYi by some definition
and (x, y) = E xiiii by some other. For example, if x = (i, -1, 1 + i)T and y = (1 - i, i, 2)T then
xT y = i(l- i) + (-I)i + (1+ i)2 = 3 + 2i(x, y) = xTy = i(1+ i) + (-1)( -i)+ (1+ i)(2) = 1 + 4i for some
(x, y) = XT Y = -i(1 + i) + (-I)i + (1 - i)(2) = 1 - 4i for some others, but they are equivalent in that
they have the same properties, for example either (x, y) or (y, x) can be used to test the orthogonality of
2 non-zero vectors.
60

where T or I denotes transposition.

4.1.1. Vector Spaces

For any position vectors u, v, w and any real numbers k, h, we have the following:

1. u+v=v+u

2. u+(v+w)=(u+v)+w

3. u + 0 = 0 + u =u
4. u+(-u)=O or u-u=O
5. k(h u) = (k h}u
6. k(u+v}=ku+kv

7. (k + h}u = ku + hu
8. 1.u = u. (4.2)

Definition 4.2. If V is an arbitrary set of objects on which the above operations are
defined, then V is said to be a vector space. If the above scalars k, h are real numbers, V
is a real vector space and if k, h are complex numbers, V is a complex space. V is closed
under addition and scalar multiplication: i.e.: if u and v are two vectors in V, so are u + v
and ku, hv.

Definition 4.3. A subset W of V is called a subspace of V if W is itself a vector space

satisfying (4.2).

Definition 4.4. A vector space V is said to be spanned by a set of r vectors

S = {VI, V2, •.• , vr } if each vector in V is a linear combination of (VI, ... , V r ) .

Definition 4.5. The vectors vIt V2, ••. ,vn over the real or complex field 2 F are said to
be independent if there exists a set of n scalars (kIt k2' kn ) such that

(4.3)

implies ki = 0 for all i where ki is a real number for the real vector space and ki is a
complex number in the complex vector space.

2Roughly speaking, a field F is defined as a set of numbers which contains the sum, difference,
product and quotient (except by zero) of every two numbers in the set. Furthennore, the numbers must
be commutative and associative, and distributive and associative with respect to addition, subtraction
and multiplication, and distributive with respect to multiplication.
 61

Definition 4.6. The set S = {VI, V2, ... , vr } in the vector space V is said to be a basis
)f V if S is linearly independent and S spans V.

Definition 4.7. The dimension oia finite vector space V is defined to be the number of
"ectors in a basis for V.

4.1.2. Inner Product Space

Definition 4.8. An inner product on a real vector space V is a function that associates
~ach vector x and y in V a number (x, y) which satisfies the following axioms

(i) (x, y) = (y, x)

(ii) (x + y, z) = (x, z) + (y, z)
(iii) (kx, y) = k(x, y} (k is a real number) (4.4)
(iv) (x,x) ~ 0(= 0 iff x = 0).

If x and yare two non-zero real vectors in V and (x, y) =

0 then x and yare orthogonal.
A vector space with an inner product, satisfying the above axioms is called an inner
product space.

Definition 4.9. An inner product on a complex vector space V is a function that asso-
ciates to each complex vector x E en and y E en, a number (x,y) == Ei=l XiYi where xr
is the conjugate of x" i.e. if Xr = a r + ibr then xr = a r - ibr for all r = 1,2, ... , n where
i = A. Inner products on a complex vector space satisfy the following axioms:

(i) (x, y) = (y, x)

(ii) (x + y, z) = (x, z) + (y, z)
(iii) (kx, y) = k(x, y} (4.5)
(iv) (x,x) ~ (= 0 if x = 0).

Note the difference between (i), (iii) and (iv) in (4.4) and (4.5). If x is a complex vector
in (4.5) then (x,x) ~ 0 is no longer true if(x,x}is defined as Ex? Hence, the necessity
in (4.5) to replace (x, x) == E XiXi in the complex space. The order of x and y in (x, y)
is important in the complex space, but is immaterial in the real space. Note that by our
definition, (x,ky) = k(x,y} but (kx,y) = k(x,y} in (iii) of (4.5).
A complex vector space with the above inner product (4.5) is called a complex inner
product space or unitary space.
The length, or magnitude, of a vector x is

IIxll == (x, x}1/2 { == JE ::} ~n the real vector space (4.6)

== JE XiXi III the complex vector space.
62

Any non-zero vector x in an inner product space can be normalized on division by its
length IIxll, Le. II~II. Such a normalized vector has norm 1, since by a property of norms,

(4.7)

A set of vectors in an inner product space is called an orthogonal set if each pair oj
distinct vectors in the set is orthogonal. An orthogonal set of vectors with norm 1 is
called orthonormal. These definitions carry over to the complex inner product space.

4.1.3. Null Space and Range, Rank and Kernel

If V and Ware vector spaces and F associates with each vector v E V, a uniqUE
vector W E W, then F is said to map V into W i.e. F : V -+ W. F is a linear mappin~
or transformation if F(u, v) = F(u) + F(v) and F(ku) = kF(u) V u, v E V and k E R.
For example if A is an m x n matrix then a function T : Rn -+ Rm can be defined by

T(x) = Ax

for x E Rn. Clearly T is a linear mapping. If m = n, T is also called a linear operator or

Rn.

Definition 4.10. If T : V -+ W where VeRn and W C Rm then the set of all vecton
v in V that T maps into 0 is called the kernel or null space of T, denoted kerT ane
N(T). The set of all vectors w in W that are images under T of V is called the range 0
T, denoted R(T). The dimension of R(T) is called the rank of T, denoted r(T) and tht
dimension of kerT is called the nullity of T.

In other words, the set of all nontrivial vectors x such that Ax = 0 is N(A) and tht
range of A, R(A) is the number of independent column vectors of A. Thus, ifT : Rn -+ Rn
i.e. if A is an (m x n) matrix and y E R(A) then y = Ax for some x ERn. Clearl)
y = Ax is a linear combination of all columns of A and R(A) is the set of all sud
linear combinations i.e. R(A) is the column space of A. This can be seen by writin!
A = (al, a2, ... , an) as n columns, and y = Ax as alxl + a2x2 + ... + anX n i.e. y is a linea
combination of the column vectors of A: y E R(A).

Theorem 4.1. If T : V -+ W is a linear transformation from VeRn to W C Rm

then r(T) + N(T) = n i.e. the rank and nullity of the transformation are equal to th
dimension of its domain. This is referred to as the Dimension Theorem.

Proof. See any textbook in Linear Algebra, for example Hirsch and Smale (1974), Gant
macher (1959), Strang (1976).

From the Dimension Theorem, we have, as a corollary

 63

Theorem 4.2. The dimension of the solution space of Ax = 0 is n - r(A) i.e. the
number of columns of A minus its mnk, where A is an m x n matrix. This theorem plays
an important part in eigenspace where m = n, as can be seen later.

4.2. Matrices

Definition 4.11. A matrix A is a rectangular array of entries aij (1 :::; i :::; m, 1 :::; j :::; n)
from a field F (field of real or complex numbers):

(4.8)

<
where m ;:; n. A is said to be of dimension or order m x n. Where m = n, A is said to
>
be a square matrix; when n = 1, A is a column vector of m elements (i.e. A is m xl) and
when m = 1, then 1 x n matrix is a row vector of n elements.
In terms of vectors, A may be looked at as a set of m row vectors of n elements each,
or a set of n columns of m component each, i.e.

al.]
[ a2'
= [al·,a2·"" ,an']' (4.9)
a~.
The sub-space of Rn spanned by the row vectors is called the row space of A and the
sub-space of Rm spanned by the column vectors is called the column space of A. It can be
shown that these spaces are not changed by elementary operations (multiplying a row by
a non-zero constant, interchanging two rows and adding a multiple of a row to another).
It could also be shown that for any matrix A, the row space and column space have the
same dimension, which is called the rank of A denoted as r(A). Thus r(A) is the number
of independent rows (or columns) of a matrix A.
Two matrices A and B are said to be equal if they have the same order and same
corresponding elements i.e. A = B means aij = bij for all i, j.
AT or A' is called A transposed when rows and column are interchanged. More pre-
cisely, for an m X n matrix A = [aji] (1 :::; i :::; m; 1 :::; j :::; n) we can define an m x n
matrix A' = [aij] called transposed A.

4.2.1. Some Special Matrices

A square matrix A is called a

64

..
D efi mtlOn 4 .12. D'lagona1 matrIX. A = aiivii
I: h
were I:
Vij = {10 if ii
if = jj ..I.e.
:# .
a matrIX
with all its off-diagonal terms zero. A diagonal matrix with 1 on the diagonal is called a
unit matrix I = [~ij].

Definition 4.13. Symmetric matrix if aij = aji for all i,j, i.e. A = AT A' i.e. A
is its own transpose. A skew-symmetric if aij = -aji IrJ i,j i.e. A = _AT i.e. when
=
A is the negative of its own transpose. By definition, diagonal terms are zero, since
aii = =
-aii :} aii 0 IrJ i. Note that every square matrix A can be expressed as a sum of
a symmetric As and skew-symmetric Ar i.e.

A=As+Ar (4.10)
where As = !(A + AT) and Ar = !(A - AT).

Definition 4.14. Idempotent if A2 = A. E.g. I or (~ g) or P = X(X'X)-l X' are all

idempotent matrices.

Definition 4.15. Nilpotent of degree k if there exists an integer k ~ 2 such that Ak =

0# Ak-l. For example A = (g ~) is a nilpotent matrix of degree 2 since A2 = [0].
Definition 4.16. Jacobian matrix J (or JI) if its elements are the first derivatives of a
vector function f(x) =
(JI(x), P(x), ... , r(x)) i.e. JI [aii] = =
[~]. For example if
f = (Xl + 2XIX2, xi + XIX2) then JI = [ 1 +2Xl2X2 2XI].
Xl

Definition 4.17. Hessian matrix HI if each element is a second derivative of a scalar

function f(XI, .. "X n ) i.e. HI = [aii] = [8~;28~.] (i,j = 1,2, ... ,n). Note that Hessian
• • J
matrices are symmetric.

Definition 4.18. The exponential function of a square matrix, e A , is defined as:

Ak
L -k'
00

eA = I + A + A 2 /2! + A 3 /3! + ... = (4.11)

k=O .

This is analogous to the Taylor expansion of the scalar function e".

4.2.2. Matrix Operations

Addition: Two matrices A and B of the same order can be added by addin~
corresponding elements i.e. A ± B = C = [eij] where Cij = aij + bij lrJi,j. AdditioI
is commutative and associative, i.e. A + B = B + A and A + (B + C) = (A + B) + C.

MUltiplication: The product of a matrix A by a scalar k (real or complex) i!

kA = k[aij], which is a matrix each element of which is multiplied by k. Multipli
cation is cummutative, associative and distributive, kA = Ak, k(hA) = (kh)A anc
=
(k + h)A kA + hA.
 65

The product of an (m X r) matrix A by an (r X n) matrix B is an (m X n) matrix G,

i.e. AB = G:: [C;j] with element

Cij = E ai/"blej for all Ji . =-- 1,1, ...

r

Ie=l
,m
... ,n

Matrix multiplication is associative and distributive but in general not commutative, i.e.

= A(BG)
(AB)G

(A + B)G = AG + Be
but AB # BA in general.
Note that the transpose of a matrix product is the product in reverse order i.e.

(ABGD)' = D'G' B' A'.

4.3. Determinants Function

Definition 4.19. The determinant of an (n X n) matrix A, denoted det A or IAI, is

defined as the sum of the n! signed elementary products from A, i.e.

detA:: IAI = E(-1)t(P)alj,a2h'" ani. (4.12)

p

where il, h, ... ,jn is a permutation p of 1,2, ... , n, where p varies over all permutations
and t(p) is the number of permutations needed to restore natural order. Note that this
number is always even (0,2,4 ... ) or odd (1,3,5 ... ) and the sign of t(p) is respectively +
or -. For example when n = 2, detA = ana22 - a12a2b the latter has one permutation
in the second subscript, and hence is preceded by minus.

Thus det A is by definition a product alii' ... anj. in which one element is taken from
each row and from each column in each term of the expansion of det A, i.e. det A is an
additive homogeneous function of its columns or rows.

4.3.1. Properties of Determinants

The properties of determinants follow from the above definition. We are simply listing
the main ones here, leaving their proofs (based on t(p) and homogeneity above) as an
exercise to interested readers.

P.1 IAI = IATI i.e. a matrix A and its transpose AT have the same determinant.
P.2 If A has 2 identical rows (or columns) or one row (column) as a multiple of another,
then det A = O.
66

P.3 If B is obtained from A by interchanging any two rows or columns, then det B =
-detA.
PA If A has a row or column of zeros, then det A = o.
P.5 If A is a diagonal matrix or a triangular matrix then det A = ITa;; = product of
diagonal terms.
P.6 If any row or column of A is mUltiplied by a scalar k, then its determinant is k det A.
Hence det(kA) = k n det A. In particular, det( -A) = (_l)n det A.
P.7 If B is obtained from A by adding a multiple of one row (or column) of A to another,
then det B = det A.
P.8 If the elements of the (n x n) matrix A are differentiable functions of x and
A == [at, a2, ... ,an] then by product rule, ~ (det A)
d d
= detLt ai, a2, ... ,an] +
det[al Tza2, ... , an] + ... + det[al, ... , Tzan].
Z

4.3.2. Computation of Determinants

Expansion by Co-factors.

The (n - 1) determinant Mij obtained from det A of order n, by deleting row i and
column j, is called the minor of aij in A and Aij = (-l)i+jMij its cofactor. Then by
definition
det A == IAI = L aijAij for all i
j

= L aij Aij for all j (4.13)

i

The first, Ej aijAij is called the expansion of det A by the cofactors of row i and the
second, Ei aijAij is called the expansion by the cofactors of column j (any j, i).
Note that from the definition of determinants, Ej aijAkj = 0 if i :j:. k and Ei aijAik = 0
if j :j:. k. These are referred to as an expansion of det A by alien cofactors.

Laplace Expansion.

When aij above is, instead, an (r x r) block in an n x n matrix A (r < n), call it B r ,
then the (n - r) determinant obtained by deleting the above r rows and r columns, is
called the (n-r) complementary minor, Mn-r and C n- r == (_1)8 Mn-r its complementary
cofactor or algebraic complement, where s is the sum s = E i + E j. Then
det A = L IBrlICn-rl (4.14)
(j)
 67

where the summation is taken over all possible permutations of the n second subscripts
taken r at a time. This is called a Laplace expansion of det A.

Example 4.1.

A- [1
The expansion by the first 2 rows gives

detA = 1~ ; 1(_1)1+2+1+21 ~ ! 1+1~ ~ 1(-1)1+2+1+31; ! 1

+1 ~ ~ 1(-1)1+2+1+41; ~ 1+1; ~ 1(_1)1+2+2+31 ~ ! 1
I;
+ ~ 1(_1)1+2+2+41 ~ ~ 1+1~ ~ 1(_1)1+2+3+41 ~ ; 1
= (1)(1) +0+0+0+(-1)(0) +0= 1

Example 4.2.

det [- :1:- -: ~-+-: -~-;:-] -I: ~ 1(- 1) H'H+> 1~ ~ 1+ 0+0...

= (1)(2) = 2
Example 4.3.
det [~ ~] = det A . det D

Application of Laplace expansion gives the following useful theorems.

Lemma 4.1. Let M by any 2n x 2n matrix and N == [~ ~] then det M = det(M N).

Proof. Det(MN) is det M to the first n columns of which are added its last n
columns each multiplied by elements of C in N. Hence by property P.7 above,
detM = det(MN). (QED)

Theorem 4.3.
det(AB) = det A . det B. (4.15)

Proof.
[~;][~ ~]=[}B;]
By Lemma 4.1, det [~ -:] [~ ~] = det [~ -:]; and by Laplace expansion

det [~ -:] = det B· det A and equally det [:B -:] = det(AB). (QED)
68

Theorem 4.4. If A is non-singular,

det [~ ~] =detA.det{D-CA-1B) (4.16)

Proof.
[C~-l ~] [~ ~ _CA-iB ] [~ A-;B] = [~ ~].
By Theorem 4.3 the product of the 3 determinants on the LHS is (I) det(A) det(D -
CA- 1B)(1) = det [~ ~] on the RHS. (QED)

Note that the term D - CA-1B is called the Schur complement of A in (~ ~).
Similarly if A is singular but D is not, det (~ ~) = det D . det(A - BD-1C) and
A - BD-IC is the Schur complement of D in (~ ~).

4.4. Matrix Inversion and Applications

Definition 4.20. A square matrix A is said to be invertible if there exists a square matrix
B of the same order such that AB = BA = I where I is the unit matrix of the same
order. B is called the inverse of A and written as B = A-I and AA-I = A-1A = I.
The computation of A-I could be carried out by Gaussian elimination, using elemen-
tary operations, (see any textbook on linear Algebra), or by using adjoint matrix and
determinant, as follows.

Definition 4.21. The matrix whose elements are cofactors Aij in transposed order, is
called adjoint A, denoted (adj A) and defined as:

... Ani
An2
1
(4.17)

Ann
From these definitions.

A(adj A) = (adj A)A = (detA)· I (4.18)

or in full, remembering that E aijA kj = IA18ik , 'Vi, k,

AnI 1 = [IAI I~I

Ann 0

Similarly (adj A)A = (detA)I.

 69

If A is non-singular, det A =F 0, division by det A (which is a scalar), gives

(adj A) A = A (adj A) = I. (4.19)

detA detA
Hence A-I == (adj A)/ detA by definition.
An important application is the solution of linear equations systems Ax b.
Pre-multiplying by A-I, provided IAI =F 0, gives

(4.20)

The case where b = 0, we have the homogeneous equations system Ax = 0 whose non
trivial solution (i.e. x =F 0) requires A to be singular i.e. det A = O. If A is non singular,
i.e. detA =F 0, then the only solution of Ax =F 0 is the trivial one x = A-I(O) = O.

Note that, written out separately, each element Xi of x in (4.19) is the Cramer's rule
Xi = IAMIAI where IAil is IAI whose column i has been replaced by column b. Take i = 1
for definiteness: Xl = 'IW = I!I (Allb l +A 21 b2 + ... + Anlbn) which is exactly the first row
of A-Ib, multiplied by column b, term by term, i.e. Xl = (A-Ib)'el.
In general, Ax = b where A is m x n, has a solution iff r(A) = r(A:b): b being a
linear combination of the column vectors of A. If r(A) < r(Ab), no solutions exist and if
r(A) = r(Ab) < n, there exists an infinite number of solutions with (n-r) variables being
assigned arbitrary parametric values. For the homogeneous case of Ax = 0, if r(A) < n,
there exists an infinite number of solutions with (n - r) variables treated as parameters.
If s is a particular solution of Ax = b and tEN (A) then s + t is a solution of Ax = band
t E N(A) then s + t is a solution of Ax = b. To see this, examine A(s + t) = b + 0 = b,
hence s + t is a solution of Ax = b. We shall encounter this in Chapters 5 and 6.

4.5. Eigenvalues and Eigenvectors

Eigen,values and eigenvectors play a very important part in many theoretical and
applied problems in every field.

Definition 4.22. Given n x n matrix A, a non-zero vector x in Rn is called an eigenvector

of A if for some scalar >., called eigenvalue of A,

Ax = >.x (4.21)

where x is called an eigenvector corresponding to the eigenvalue >.: x is in the solution

space of (A - >.I)x = 0, which is called the eigenspace of A corresponding to >.. In terms
of the linear operator T : V -+ V discussed in 4.1.3 above, if for some>. E R and x E V,
Tx = >.x, then>. is called an eigenvalue of T and x, its corresponding eigenvector. The
eigenvectors of T are thus in the kernel of (T - >.I) which is called the eigenspace of T
corresponding to >.. If A is a matrix of T, then the eigenvalues of T are also those of A
and an eigenvector x of T is also an eigenvector of A, corresponding to >..
70

Note that x in (4.21) is a right eigenvector of A, in contradistinction with y' A = >'y'

where y is a left eigenvector of A. If A is symmetric, x = y, otherwise right and left
eigenvectors are the inverse of each other.3 Note also that it is a matter of taste to write
(4.21) as (A - >.1)x = 0 or (>.I - A)x = O. Eigenvalues are also called proper values,
characteristic values or latent roots and similarly eigenvectors are also called characteristic
vectors or latent vectors by some authors. 4 From the definition, it can be seen that vector
x stretches itself, shrinks or reverses direction on multiplication by matrix A depending
on whether>' > 1, 0 < >. < 1 or >. < O.
The solution of Ax = >.x or (A - >.I)x = 0 for any non-zero vector x requires (A - >.1)
to be singular (otherwise x = (A->'1)- l O = 0, a contradiction) i.e. det{A->.1) = O. The
function
(4.22)
is called the characteristic equation of A. Its expansion gives a polynomial of degree n
in >. and is called the characteristic polynomial of A. This has n roots which are the n
eigenvalues of A. The set of all these eigenvalues is called the spectrum of A, denoted
cr(A). The coefficients Cr are the sum of principal minors of order r (I ~ r ~ n), i.e.
n
Cl = L aii = trace A = sum of principal minors of order 1
1
(i.e. sum of all diagonal terms of A).
C2 = sum of all principal minors of order 2, and so on
Cn = det A = principal minor of order n (which is det A).
For example, if n = 2

c(>') = IA. - >.II = I aua21- >. a12 \

a22 - /\
I= (au - >.)(a22 - >.) - a12a21 = 0
= >.2 - (au + a22)>' + (aUa22 - a12a21) = 0
=>.2- r >.+8=0 {4.23}
where r = trace A = tr A and 8 = det A. This is a quadratic function in >. (polynomial
of order 2) the solution of which is

{4.24}

3This can be seen by taking the transpose of (A - >.1)x = O. Clearly [(A - >.1)xl' = x'(A - >.1)' =
x' (A' - >.1) = O. If A = A', the right eigenvector x and the left eigenvector y are the same i.e. x' (A' - >.1) =
x'{A - >.1) == Y'{A - >.1) = O.
For the general case of a non-symmetric matrix, with distinct eigenvalues, the right and left eigenvectors
are the inverse of each other. This can be seen by writing y' A = >.y' for the left eigenvector y and
Ax = >.x for the right eigenvector x. Let Q = the matrix of left eigenvectors·and P = the matrix of
right eigenvectors then clearly QA = AQ where A == diag (>'1o>'2, ... ,>'n), AP = PA. The first gives
QAQ-l = A. The second gives P-1AP = A. Hence Q = p-l.
4Certain authors, such as Lancaster (1966 p. 12), make the distinction between eigenvalues and latent
roots.
In the case of constant matrix A, the two are the same but in the case A{/1) is a function of some
parameter /1, such as the case of lambda matrices, the two are different: eigenvalues are dependent on
/1 while latent roots and vectors are not. Inman (1989 p. 59) complains that this excellent distinction
does not catch on in the literature. We shall follow the crowd and use them interchangeably so long as
confusion does not arise.
 71

For n = 3,
(4.25)

where

CI :; tr A :; T = an + a22 + a33
C2 = sum of principal minors of order 2
:; Iaua21 al21 +
a22
Ialla31 I
al31 + a22 a231
a33 a32 a33
C3 = detA.

Note that had we adopted the practice of writing (4.21) as ()..J -A)x = 0 (4.22) would
be (-1)nC(A) = det()..J-A) = An-CIAn-I+C2An-2+ ... +(-1)ncn = 0 = (-1) n det(A-)..J)
by property P.6 of determinants in 4.3.1 above. We shall adopt (4.22).

Example 4.4.

A = [~ ;] C(A) = A2 - TA +8=0
= A2 - 11A + 24 =0
!
this gives two eigenvalues A = (11 ± V(l1)2 - 24)) = (3,8).
To compute the eigenvectors x, in order to find the basis for the eigenspace of A, we
solve (A - A;I)xi = 0 for each i (i = 1,2, ... , n if A is n x n). In example 4.4, these are:

For Al = 3, (A - AII)x l :; [~ !] [ =~] = [~] giving X2 = 8 (any nonzero

parameter) and Xl = -2X2 = -28 i.e. the first eigenvector Xl is xl = 8 [ ~2 ] = [ ~2 ]

for 8 = 1.

]
= 8, (A - A2I)x 2 = [~4 ~1] [=~ = [~] giving 4XI = 2X2 or X2 = t (any
For A2
parameter), Xl = !t i.e. the second eigenvector x 2 is x 2 = t [ 1{2 ] = [~] for t = 2.

The matrix P whose columns are eigenvectors is P = [~2 ~] .

It is easy to see that if A is an eigenvalue of A then An is an eigenvalue of An and A-I
is an eigenvalue of A-I (the special case where n = -1 which says that the eigenvalues of
an inverse matrix A-I are the inverses of the eigenvalues of A). Clearly if Ax = .AX

and for n = -1, Ax = AX gives A-lAx = AA-Ix i.e. x = AA-Ix, and

(4.26)
72

Finally, note that for an (nxn) matrix A, the characteristic polynomialdet(A-.H) =0

gives n eigenvalues which could be
(i) all distinct and nonzero: A is then called a simple matrix;
(ii) repeated mi times: ).i is said to have the algebraic multiplicity of mi for some i;
(iii) complex, coming in pairs ).r = Or ± if3r (some r) Or, f3r E R, i 2 = -1;
(iv) zero for some j: A is then called a non-simple or defective matrix.
These play an important part in the study of stability later.

Eigenvalues and Eigenvectors of Some Special Matrices

4.5.1. Similar Matrices

Definition 4.23. Two matrices A and B are said to be similar to each other if there
exists a nonsingular matrix P such that B = p-l AP. If P is an orthogonal matrix,
p-l = pI, then B = p-l AP = PAP and B is said to be orthogonally similar to A.

Similar matrices have the same determinants, since B = p-l AP gives, upon taking
determinants and remembering that the determinant of a matrix product is the product
of determinants
IBI = Ip-IIIAIIPI = IAllp-IIIPI = IAI (4.27)
since p-1p = I, Ip-111PI = III = 1.
Similar matrices also have the same characteristic equations. Let B = p- l AP, i.e. B
and A are similar to each other, then their characteristic equations are
c().) = IB - = IF-lAP - .HI = IP-I(A -
),11 ).I)PI = Ip-ll IA - ),11 IFI
= IA - .Hllp-IIIFI = IA - ),11 = c().). (4.28)
Note however that although similar matrices have the same eigenvalues, they do not
have the same eigenvectors: these are transformations of one another. To see this, let
B = p-l AP as before and let). be an eigenvalue of B with y its corresponding eigenvector.
Then clearly

By = ).y
P-IAPy =).y
APy = ).Py
Ax =).x (4.29)

where x == Py i.e. eigenvectors x and y are multiples of each other: A and B have the
same eigenvalues). but not the same eigenvectors.
Similar matrices also have the same traces, trace being defined as the sum of diagonal
terms of a matrix. To see this first note that if A is an m X nand B an n X m matrix,
then
 73

Lemma 4.2. tr (AB) = tr (BA) (in general tr (ABC) = tr (BCA) = tr (CAB)).

Proof. By direct computation

E E aijbji = tr E E bjiaji =tr (BA).

m n n n
tr (AB) = tr
i=l j=l j=l i=l

[i'or example if A is 2 x 3 and B is 3 x 2, we have

E a1jbj1 + E a2jbj2 =E E aijbji

3 3 2 3
tr (AB) =
j=l j=l i=lj=l

= E b1jaj1 + E ~iai2 + E b3i ai3 =E E biiaii

2 2 2 3 2
tr (BA) (QED)
i=l j=l i=l i=l i=l
Theorem 4.5. Similar matrices have the same traces.
Proof. Let p-1 AP = A i.e. A and A are similar matrices. Then tr (P- 1AP)
Gr (APP-1) = tr A = tr A = Ei.x i where A =diag(.x i).

4.5.2. Real Symmetric Matrices

Real symmetric matrices present some interesting and useful properties:

Theorem 4.6. The eigenvalues of a real symmetric matrix are real.
Proof. Suppose not. Then Ax = .xx and Ax = .xx where indicates conjugates.
Pre-multiply the first equation by x' and the second by x', we have x'Ax = .xx'x and
r'Ax = Xx'x. But (x'Ax)' = x'Ax. Hence 0 = (.x - X)x'x, i.e. A = Xi.e. A is real, since
f'x> 0 (see footnote 4.1).

Theorem 4.7. The eigenvectors associated with distinct eigenvalues of a real symmetric
matrix are orthogonal.
Proof. Take any two distinct eigenvalues Ai and Aj (i =F j) of a real symmetric matrix A
md their corresponding eigenvectors Xi and xi. We have
AXi = Ai Xi
Axj = .xjxi .
Premultiplication of the first equation by xi and the second by xi gives
= Ai Xj . xi
x j . AXi
xi. Axi = AjXi . xi.
But (xi. Axi)' = xi. A'xi = xi. Axi , A being symmetric. Hence
(Ai - Aj)Xi . xi = o. (4.30)
Since Ai =F Aj by hypothesis, Xi ·xi = 0 i.e. Xi and x j , both non-zero vectors, are orthogonal.
Since i and j are arbitrary, the result is proved.
74

Theorem 4.8. If an eigenvalue >'i of a symmetric matrix A has multiplicity mi, then
will be mi orthogonal eigenvectors corresponding to this >'i. In other words, the algebrail
multiplicity, if any, of an eigenvalue is always equal to its geometric multiplicity, ani
hence A is always diagonalizable.

Proof. Hadley (1961) pp. 243-245.

4.6. Quadratic Forms

Quadratic forms involve symmetric matrices whose properties were investigated in th(
last section.

Definition 4.24. Given any square symmetric matrix A, the quadratic form Q(x) i:
defined as
Q(x) = L~::aijXiXj == x'Ax == X· Ax == (x, Ax}.
i j

In the complex space, the first x is the complex conjugate x·.

Definition 4.25. A real symmetric matrix A is said to be positive definite if for all non
zero x vectors, x'Ax == (x,Ax) > 0; positive semi-definite if x'Ax 2: 0, and IAI = (
negative definite if x' Ax < 0, and negative semi-definite if x' Ax ~ 0 and IAI = o.
In the complex case, a real symmetric matrix A is said to be positive definite (negativi
definite) if for all non-zero complex vector X, (x,Ax) == x' Ax> 0 « 0) where x is thl
complex conjugate of x. i.e. if x == '11 + iv then x == '11 - iv where '11 and v are real vector:
and i 2 =-l.
Thus x' Ax == x· Ax == (x, Ax) = ('11 - iv)' A(u + iv) = ('11, Au) + (v, Av) > o.

Theorem 4.9. A real square symmetric matrix A is positive (negative) definite iff all it
eigenvalues are positive (negative).

Proof. Let >'i be any eigenvalue of A and xi its associated eigenvector, i.e. AXi = >'ixi
Premultiplying this by xi and omitting superscript and subscript i to alleviate notation
we have x' Ax = >.x' x, or
x'Ax
>.=-
x'x
Clearly x' x > O. It is then clear that>. > 0 => x' Ax > 0 and conversely x' Ax > 0 => >. >0
Similarly, >. < 0 {:} x' Ax < O. Since i is arbitrary, the theorem is proved. (QED).

The quadratic form Q(x) == x' Ax can be greatly simplified by orthogonally diagonal
izing A, using the transformation x = Poy where Po is the normalized modal matrix 0
A, i.e. Po = [xl/llx/Il,X2/I1x211 ... xn/llxnlil where PO- 1 = P~. This gives

PO- 1APo = P~APo = A. (4.31

 75

This allows quadratic forms to be examined very simply by use of orthonormal trans-
formation x = poY which gives

Q(x) = x'Ax = (Poy)'APoY = y'p(;APoY = .xIY~ + ... + .xny! (4.32)

which shows that x' Ax > 0 if .xi > 0 for all i and x' Ax < 0 if .xi < 0 for all i.
A further transformation Wi == (A )Yi gives
n n
x'Ax =E .xiY~ = ±w~ ± w~ + ... = E±w~, say
I 1
_ 2+
- WI W22+ ... + Wp2 - Wp+l'
2
... wn2 (4.33)
where the coefficient of Wi are ±1, +1 when .xi > 0 and -1 when .xi < O.
Definition 4.26. The number (p) of positive eigenvalues of A (or the number of +1 in
E ±w;) is called the index of A, the total number of non-zero eigenvalues of A is the rank
(r) of A and the difference between positive and negative eigenvalues of A is called the
signature of A. If r = n, and the index is p, then the signature is p - (n - p) = 2p - n.
If r < n then the signature is p - (r - p) = 2p - r. Sylvester's law of inertia asserts that
rand p are invariant under congruent transformations i.e. if A is an n x n non singular
matrix then so is p-I AP (or P~APo for orthonormal P) = A and A and A have the same
rank, index and signature.

Example 4.5.

i.e. Q(x) == x'Ax = y'p(;APoY = Ay = -3y~ + 3yi

= -w~ + wi where Wi == .f).iYi (.xi = ±3).
The index of Q(x) is 1 since .x3 = 3 > 0 is the only positive eigenvalue of A; the signature
is 1 - 1 = 0; the rank r = 2.

4.7. Diagonalization of Matrices

Given an n-square matrix A, the characteristic equation

76

is a polynomial equation of A of degree n. Its solution gives n roots (A1> A2," . ,An) which
(i) may be all distinct and non-zero (in which case the rank of A is n);
(ii) some Ai = 0 (if A is of rank r then only r eigenvalues are non-zero, the remainin~
n - r eigenvalues (Ar+l' Ar+2, ... ,An) = (0,0, ... ,0) are zero);
(iii) some Ai may be repeated mi times (mi is called the algebraic mUltiplicity of Ai); or
(iv) some Ar may be complex, in which case they come in pairs Ar = Or ± if3r where
i = A and Or, f3r both real numbers.

Definition 4.27. A square matrix A is diagonalizable if there exists some non-singulaJ

matrix P such that p- l AP = A == diag (AI, A2,'" ,An).

4.7.1. Real Eigenvalues

Theorem 4.10. An n-square matrix A is diagonalizable iff it has n independent eigen·

vectors.

Proof. From the definition of eigenvalues, Ax = AX, we have

A[xl, x 2 , •• . , xn] = [x' AI, x 2 A2,"" xn An]

or
AP=PA
giving p-l AP = A where P == [xl, x 2 , ••• ,xn] = modal matrix whose columns are thE
eigenvectors of A and A = [diag (Ai)]. Thus P diagonalizes A. For this, p- l must exist
i.e. the columns of P which are the eigenvectors of A must be independent. Conversely
if Pis nonsingular, p- l exists and p- l AP = A i.e. P diagonalizes A. (QED)

Example 4.6. A = [~ !l]; C(A) = 0 gives A = (3, -2).

For Al = 3, (A - AlI)X = ( 2; 3 _12_ 3 ) ( :: ) = (~) => xl = ( ~ ).
For A2 = -2, (A - A2I)x = (~ ~) ( :~ ) = (~) => x 2 = [-;1 ], P-lAP = A ==
[~ ~2] since P == (X l X2 ) == [~ -;1] is nonsingular, i.e. Xl and x2 are independen1
vectors.

Note that eigenvectors are not unique: if v is an eigenvector, so is kv for any nonzerc
scalar k. If k = II~II where IIvll = (vf + v~)1/2 = norm of v, then P is called a normalize<
modal matrix, written, say, as Po, then Po is unique. In this example, xA = ~ n)
x~ = ~ (-;1) and -l and P~APo = [~ ~2] = POl APo.
Po = PO
 77

Note that if A has no repeated eigenvalues i.e. if ~t. ~2,"" ~n are all distinct, A is
said to be a simple matrix. Then P is non singular and A is diagonalizable.
Not all matrices are diagonalizable. Those which are not, are called defective. For
example, A = (~ ~) has a double zero eigenvalue ~l = 0 = ~2 and the unique corre-
sponding eigenvector x = k ( ~ ). Since ~ has multiplicity m = 2 but there is only one
independent eigenvector, there exist no modal matrices P such that p-l AP = A. The
number of independent eigenvectors corresponding to a repeated eigenvalue is called the
geometric multiplicity.
If ~i has multiplicity mi, i.e. ~i is repeated mi times, then all depends on N(A - ~;l),
the null space of (A - ~;l) i.e. the number of vectors Xi (i = 1,2, ... ) such that
Axi - ~ixi = O. If there exists a full set of independent eigenvectors, then A is diag-
onalizable. Otherwise it is not.

Theorem 4.11. A n-square constant matrix A having degeneracy a has a null eigenvalue
with multiplicity m ~ a.

Proof. Clearly the rank r(A) = n - a (i.e. there are only n - a non-zero eigenvalues),
and the coefficients cn - a +! = 0 = Cn - a +2 = ... = Cn-l = Cn = 0 in the characteristic
equation c(~) = IA - AIl = (_l)n~n + (_l)n-l~n-lcl + ... + Cn = 0, since all minors of
A of the order greater than r vanish. Thus

(4.35)

Hence there exists a null eigenvalue of multiplicity of at least a. Similarly, it could be

shown that

Theorem 4.12. If a is the dimension of the subspace of eigenvectors associated with

eigenvalue ~i of multiplicity mi then mi ~ a.

Proof. (See, for example, Lancaster 1969).

Since a is the geometric multiplicity, i.e. a is the dimension of the null space N(A-~;l),
and mi is the algebraic multiplicity, the above theorem is often stated in simpler form as
"the arithmetic multiplicity (m) is not less than the geometric multiplicity (a) i.e. m ~ a" .

Example 4.7.

A = [ 010 0
2 0
1; IA - AIl = (1 - A)(2 - ~)2 = O.
012

Corresponding to ~ I = 1, the eigenvector VI is VI = (~) and for ~2 = (2, 2), the

eigenvector is V2 =(~) where s,i are arbitrary constants taken as parameters. Thus
there exist only two independent eigenvectors VI and V2 and hence A is not diagonalizable.
Furthermore, the arithmetic multiplicity = m = 2 ~ a = 1 = geometric multiplicity.
78

Example 4.8.

A=[~023
~ ~l
IA - All = (1 - A)2(5 - A) = 0 i.e. Al = (1,1), A2 = 5. For Al = 1, the eigenvector is
VI = ( -:) =s ( -!) + ~) t ( . For A2 = 5, the eigenvector is V2 = t ( ~) . The

1
modal matrix is
P =[ 0 1 0
-1 0 1 ; p- l =! [~ -~ ~ 1
101 2 0 1 1

p-l AP = [~ ! ~] i.e. A is diagonalizable.

4.7.2. Complex Eigenvalues and Eigenvectors

When A has complex eigenvalues, then A = a ± if3 where a, f3 E Rand i 2 = -1. In a

two-dimensional case, this could be written simply as Al = a + if3 A and A2 = a - if3
).1 = ). and the corresponding eigenvectors WI = U + iv = wand W2 = WI = U - iv = W
= =
=
are also complex, u, V E R2. Of course A could be diagonalized in the usual by Q-l AQ =
diag (A, X) using Q [w, w]. But it is more useful to decomplexify the operator A to get
R =[p -:]. More formally this can be stated as
Theorem 4.13. Let A be a linear operator on a two-dimensional vector space with com·
plex eigenvalues A = a ± if3. Then there exists a matrix representation R where

(4.36)

= =
Proof. Let w u+iv and w u-iv, (u, v E R2, i = A). Then we have u = ~(w+w)
and v = ~(w - w) i.e. u and v are independent real two-dimensional vectors and as such
[u, v] is a basis for the vector space. Details of the decomplexification of A are as follow~

A(u + iv) = (a + if3)(u + iv)

by definition
Au + iAv = (au - f3v) + i(av + f3u).
Dropping i we have Au = au - f3v and Av = av + f3u

i.e. A(u, v) = (u, v) (~ -:)

or AP = PR (4.37)
 79

(4.38)

where R has a on the diagonal and the skew-symmetric matrix j3J with ±j3 off the
diagonal.

Example 4.9. A = [!1 ~~]; c(~) = 0 gives ~ = 2 ± i, ~l = 2 + i gives

(5 - 2 - i)XI + 10x2 = 0
-Xl - (1 + 2 + i)X2 = 0

i.e. WI = (-3t i ) _ (~3) + i ( ~ ) == u + iv = WI. ~2 = Xl == X= 2 - i gives,

similarly

W2==W= (-3) .(1)

1 -1
0 ==U-lV.
P = [~3 ~]; p-l !]; P-IAP = [~ -;1] = [~ "t] == 21+J. Note
= [~
that if Q == (w,w) = [-3t i -31
-i] is used, we shall have Q-IAQ = [~ ~] =
[ 2 ci i 2 ~ i ] a diagonal matrix with complex eigenvalues on the diagonal. Note that
in the computation above, we have simply used the definition of eigenvalues as Ax = ~X
where ~ = a + ij3 and X = U + iv = eigenvector in this complex case.

4.8. Jordan Canonical Form

We have seen that the eigenvectors corresponding to distinct eigenvalues are linearly
independent and hence the modal matrix P whose columns are the eigenvectors of A is
non-singular. This allows A to be diagonalized, i.e. p-l AP = A == diag(~i)' A is called
a simple matrix if it is similar to the diagonal matrix of its eigenvalues. Matrices which
are not simple are said to be defective.
For the case some eigenvalue is repeated m times, (i.e. of arithmetic multiplicity m), we
have seen that the arithmetic multiplicity cannot be less than the geometric multiplicity a
(which is the maximum number of independent eigenvectors corresponding to the repeated
eigenvalue) i.e. m 2: a. (See examples 4.7 and 4.8).
Defective matrices are not diagonalizable. However they can be. "block-
diagonalizable." This leads to the concept of the Jordan canonical form:

Definition 4.28. For any n-square matrix A, there exists a non-singular matrix T such
that

(4.39)
80

where Ai are the eigenvalues (not necessarily distinct) of A and nl + n2 + ... + nr = n.

In,(Ai) is called a Jordan block. For example if some nr = 3,

(4.40)

Clearly if ni = 1 i.e. all eigenvalues are distinct, In,(Ai) = Ai and T-l AT = A i.e. the
Jordan canonical form is reduced to a diagonal matrix. It can be shown that the maximum
number of linearly independent eigenvectors associated with an eigenvalue is exactly the
number of Jordan blocks in which the eigenvalue appears. This number is called the index
of an eigenvalue and the theorem m ~ a could be rephrased as "the multiplicity of an
eigenvalue is not less than its index" .
The proof of this requires the introduction of many additional concepts which are not
necessary for our purpose. The interested readers can consult Gantmacher (1959), for
example.
Note that the Jordan block J could be written as

where
0 1 0

S.,=
[
~Ol (4.41 )

is called the superdiagonal matrix, with 1 in the superdiagonal position and zero every-
where else. It is easy to verify that (Sn)m = 0 for all m ~ n and Sn has only one eigenvalue
which is zero, with multiplicity n and with the right eigenspace of dimension one.

We can summarize the above discussion by the following proposition, using 2 x 2

matrices for simplicity:
Let A be a real (2 x 2) matrix, then there exists a real non-singular matrix T such
that T- 1AT = J where the Jordanian form J is one of the following types

(4.42)

where A = ~ (r ± ./r2 - 48) , r = trA; 8 = detA.

(a) is the case of two real distinct eigenvalues (AI'" A2);
(b) is the case of repeated eigenvalues A = r/2 = Al = A2 (r2 = 48); and
!
(c) is the case of complex eigenvalues A = a ± i{3 where a == r/2 and {3 == ./48 - r2, 0
and {3 being both real numbers with {3 > o. Thus for the complex case (c), J is asymmetric
matrix whose diagonal elements are the real part and the off diagonal elements are the
imaginary part of the eigenvalue.
 81

4.9. Idempotent Matrices and Projection

Definition 4.29. Let the linear space 5 have 2 subspaces 51 and 52. Then 5 is said to
be the direct sum, written as 5 = 51 $ 52 if
(a) 5, c.;, 5 (i = 1,2);
(b) For each x E 5, there exists Xl E 51 and X2 E 52 such that there is a unique vector
x = Xl +X2;
(c) If X E 51 and X E 52 then x = 0 i.e. there exist no common nonzero vectors to both
51 and 52.

51 and 52 are said to be the complement of each other and if (x, y) = 0 V x E 51

and y E 52, then 51 and 52 are said to be orthogonal complements of each other.
Idempotent matrices have important properties some of which are listed below.
If P is an idempotent matrix, i.e. P = p2 (see definition 4.14) then:
(i) its eigenvalues are either 0 or 1 i.e. A(P) = (0,1);
(ii) its rank is equal to its trace, i.e. r(P) = tr (P);
(iii) / - P is also an idempotent matrix;
(iv) R(/ - P) = N(P) and R(P) = N(/ - P);
(v) N(P) $ R(P) = 5, the n-dimensional linear space above;
(vi) P is simple;
(vii) P is a projection iff P is idempotent and symmetric (in general, hermitian).
To see these, note that
(i) Px' = A,X' and p2x' = A~X'. Since P = p 2 by definition (A~ - A,)X' = 0 i.e.
Ai(A, - l}x' = 0 => A, = (0,1) V i.
(ii) r(P} = r(A} = number of nonzero eigenvalues of P = number of times A is equal to
1 = tr A = tr P.
(iii) (/ - p)2 = / - 2P + p2 = / - P since p2 = P by definition.
(iv) If x E R(/ - P) then x = (/ - P}y, Px = P(/ - P}y = (P - P2}y = 0, hence
x E N(P). Conversely if x E N(P}, then Px = 0 and (/ - P)x = x i.e. x E R(/ - P).
Similarly for the second half of (iv).
(v) From (b) of Definition 4.29, for any x E 5, x = Xl + X2 where Xl = (1 - P}x and
X2 = Px. Thus Xl E R(/ - P) = N(P} by (iv) and X2 E R(P}. Finally, if x E R(P} and
x E N(P} then (/ - P}x = 0 and Px = 0 hence x = 0 by (c) of Definition 4.29.
(vi) By (iv), right eigenvectors of P all belong either to N(P) or N(/ -P}. But N(I -P} =
R(P} by (iv), hence N(P} $ N(I - P} = 5.
(vii) A symmetric and idempotent matrix P is a projection onto the space X spanned by
Xl, X2, . .. ,Xk, i.e. onto R(P} = N(I - P}. Let y = Xb + e where Xb lies in X and e in
the orthogonal complementary space (see Figure 4.1).
82

Figure 4.1. Projection of y onto the column space X

Projection implies minimum distance i.e. perpendicularity i.e. if Xc is any arbitrary

combination of the column of X, b must be chosen such that (Xc}'e = 0 i.e. c!X'(y-
Xb) = c!(X'y - X'Xb) = 0, C:F O. This gives b = (X'X)-lX'y and e = y - Xb =
y - X (X' X)-l X'y = (1 - P)y where P = X(X' X)-l X' is a projection matrix. This
is the typical ordinary least square method in Econometrics (see, for example, Anton &
Rorres 1987, pp. 209-218, or Johnston 1984, p. 112). Another application is in the
Liapunov-Schmidt's Reduction method.

4.10. Conclusion

This chapter was devoted to a review of some Linear Algebra. The review is bound to
be selective: only those notions which are relevant to the study of systems of Differential
and Difference equations have been covered. Yet it provides a sufficiently comprehensive
background in Linear Algebra for the study of Dynamical Systems, at this level.
Chapter 5
First Order Differential Equations Systems

5.1. Introduction

A typical system of n first order differential equations is of the form

x(t) = A(t)x(t) + b(t); x(O) = Xo (5.1)

when A(t) is in general an n X n time variant coefficient matrix and b(t) a time variant
n-vector. The constant coefficient case emerges as a particular one in which A and
b are constant. The system (5.1) is homogeneous if b = 0 and non-homogeneous
if b i:- o. The solution of the homogeneous part, x = Ax is called the general
solution of the complementary function, xc(t) and the solution that fits (5.1) is
called the particular integral (x p ) or equilibrium solution (x e ). The combination of
the two, x(t) = xc(t) +xe , gives the complete solution of (5.1). In general, if vectors
xl, x 2 , ••• ,xn are each a solution of (5.1), so is their linear combination

(5.2)

Definition 5.1. The Wronskian W(X) of the n solutions of (5.2) is the determinant
of the matrix X the columns of which are the solution vectors of (5.1), i.e.

W(X) == detX == det(xl,x 2 , ••• ,xn). (5.3)

Clearly the n solutions at a point are linearly independent iff W i:- O. In this
case, there is exactly one way to express (5.2). To see this, write (5.2) as Xc = x ::}
c = X-Ix where X-I = adj X/W(X). If W i:- 0, there is a unique non-zero vector
c.

The next four sections will be devoted to the discussion of the quantitative
solution of (5.1) and its stability conditions, followed by the qualitative solution in
the plane. Some economic applications will conclude the chapter.

5.2. Constant Coefficient Linear Differential

Equation (ODE) Systems

A typical constant coefficients linear d.e. system is

x = Ax + b, x(O) = Xo (5.4)
84

where A is an n x n constant coefficient matrix and b a constant vector. We shall

concentrate on the homogeneous function (b = 0)

x = Ax, x{O) = Xo (5.5)

in the following discussion: the non-homogeneous case (5.4) could be reduced to

(5.5) by a change of variables, as will be seen in Theorem 5.3. The solution of (5.5)
or (5.4) depends on the eigenvalues (Ai) of A (see ch. 4) to the point that solving
(5.5) amounts to solving the characteristic equation c(A) = det(A - AI) = O. Three
cases must be distinguished:
(i) All eigenvalues are real and distinct,
(ii) Some eigenvalue Ai is repeated mi times
(iii) Some eigenvalues are complex.
We shall examine each of these cases in turn.

5.2.1. Case (i): Real and Distinct Eigenvalues

Theorem 5.1. The solution of x = Ax, x{O) = Xo is

x{t) = eAtxo. (5.6)

Proof. Taylor expansion of (5.5) about t

... 3 .
= 0, remembering that x = Ax = A2xo ,
x= A Xo etc ... , gIves

x(t) = Xo + x(O)t + X(O)t2 /2!+ X (0)t 3/3! + .. .

= Xo + tAxo + A 2x ot2 /2! + A3xot3/3! + .. .
= {I + At + A 2t 2/2! + .. ,)xo
== eAtxo
by the definition of eAt == I + At + A 2t 2/2! + ... (t E R). (QED)

In applied, and even theoretical, problems, (5.6) is of limited usefulness: an

alternative form of (5.6) obtained by diagonalizing A, using similarity transformation
(see Ch. 4) in the next theorem will facilitate the computation of results and stability
analysis.

Theorem 5.2. The solution of x = Ax, x{O) = xo, A diagonalizable, is

x(t) = eAtxo = PeAt p-Ixo (5.7)

where P == (VI, V2, ... , Vn ) = modal matrix whose columns are eigenvectors of A and
A == [diag Ai] = a diagonal matrix whose diagonal elements are eigenvalues of A
(see ch. 4).
 85

Proof. Distinct real eigenvalues ensure linearly independent eigenvectors and hence
non-singularity of P (see Theorem 4.10) and A is diagonalizable. From the definition
of eigenvalues Av; = .\;v;, we have A(Vb ... , Vn) = (.\lVb ... , .\nVn) or AP = PA
and hence P- 1AP = A or A= PAP- 1

But eAt = I+ At + A 2t 2/2! + ...

= I+ PAP-It + PA2p- 1t 2/2! + ...
= P(I + At + A 2t 2/2! + ... )P-1
= PeAt p- 1 by the definition of eAt.

Hence
(5.7)
(QED)

Remark 5.1. In the light of first order ODE in Chapter 2, (5.7) can be obtained
by trying a solution x(t) = ve.\t for some constant vector v. Differentiation gives
j; = .\ve.\t = Ave.\t or (A - .\I)ve.\t = 0 ~ (A - .\I)v = 0 ~ (A - .\I) is singular
(since v =F 0). This gives c(.\) == det (A -.\I) = 0 from which .\ 1, '\2, ... , .\n are found
and substituted into x(t) = C1v1e.\lt +c2v2e~t+ ... +envne.\.. t which is exactly (5.7).

Example 5.1. Solve j; = Ax, Xo = (:) , A = (~ =~) c(.\) = IA -.\II =

17; ~ _;-~ ~ 1= .\2 - 6.\ + 5 == .\2 - r.\ + IS = 0 where r == tr A and IS == detA.
This gives .\ = (1,5).
For .\1 = 1, (A - .\lI)V1= 0 gives VI = ( i) .
For .\2 = 5, (A ~ 5I)v2 = 0 gives V2 = ( ~) .

P == (Vb V2) = (i ~); p- 1 = (-!~: _~~~); p-1xo = ( _~ ) == ( ~~ ) (5.7)

gives

0)( -13)_p
eSt
At
= e c

Theorem 5.3. The solution of (5 ..,0 i.e. of j; = Ax + b, x(O) = Xo is

x(t) = eAtc - A- 1b (5.8)

where c == Xo + A- 1b or in the alternative form, provided A is diagonalizable,

(5.9)
86

Proof. Define x + A-Ib == y and substitute it into (5.4), we get

iJ = ± = Ax + b = A(x + A-Ib) == Ay
the solution of which, by Theorem 5.1 is

y(t) = eAt Yo == PeAt P-Iyo

or

x(t) = eAt(xo + A-Ib) - A-Ib

= PeAt p-I(XO + A-Ib) - A-lb. (5.9)

(QED)

Remark 5.2. Note that

(i) Ye == yp = -A-Ib could be obtained by solving (5.4) for ± = O. This is the
equilibrium Ye or particular integral yp. Thus c == Xo - Xe = deviation of x(t) from
its equilibrium Xe at t = O.
(ii) The complete solution (5.9) has two parts: the complementary function xc(t) =
eAtc showing the system's deviation from equilibrium at any time t and Xe = -A-Ib,
the particular integral xp (or xe) showing the equilibrium itself, just as we have
observed in Chapter 2.
(iii) Thus ~e can proceed by trying a solution of the form x(t) = ve M as in Remark
5.1 and solve for xc(t). For equilibrium, ± = 0 = Ax + b gives Xe = -A-Ib if A is
non-singular. The complete solution is x(t) = xc(t) + Xe = eAtc - A-lb.

Example 5.2. Solve

( :~ ) = (~ ;) ( ~~ ) + ( ~ ) , Xo = ( ; )
Xe = -A-Ib = -1 (-i -~) ( ; ) = - ( ~~: )
c(-\) = IA - All = -\2 -
4-\ + 3 = 0 :::} -\ = (3,1)
P= ( ) _ (1 -1) p-l _ ( 1/2 1/2)
1 l' - -1/2 1/2 '
)
- VI V2 -

c == Xo + A-Ib = ( ~ ) + ( ~~: ) = ( 1~~:

x(t) = PeAtp-Ic - A-Ib

=
( 1 -1)
1 1
(e0 3t
0) ( 1/2 1/2) ( 10/3 ) _ ( 7/3 )
et -1/2 1/2 7/3 1/3

= ¥(~ )e 3t _ ~ -~ ( ) et _ ( ~~~ )
 87

5.2.2. Case (ii): Repeated Eigenvalues

Consider the system x = Ax where A has repeated eigenvalues, say some Ai

repeated mi times. We know from Theorem 4.6.3 that the number a of independent
eigenvectors corresponding to Ai cannot exceed mi (i.e. a ~ mi). For example
A = (~ ~) is defective: it has a repeated eigenvalue Al = 0 = A2 (m = 2) and
yet only one eigenvector (1,0). In some other cases, such as in Example 4.5.4, A
has A = (1,1) (m = 2) and two associated eigenvectors. In this case, repeated
eigenvalues make no difference: A has n independent eigenvectors and hence it is
diagonalizable. The problem arises when a < m : we cannot try a solution to x = Ax
of the form x(t) = ve>.t as in Remark 5.1, since there are not enough eigenvectors.
For example A = (-i _~) has a repeated eigenvalue A = (-2, -2) and only
one eigenvector (0,1). In such cases, the solution to try is not x(t) = ve>.t but
x(t) = e>.t(tvi + V2). Substituting into x = Ax gives

i.e.
AVI = AVI or (A - U)VI = 0
AV2 = AV2 + VI or (A-U)V2=VI
Multiplying both sides by (A - U), remembering that by the definition of eigenvec-
tors, (A - AI)VI = 0, VI '" 0, we have

I.e.
(A- U)2V2 = 0
Each vector V2 is called a generalized eigenvector of A. For example if x= Ax
has an eigenvalue A repeated 3 times, its solution vector is

(5.10)

a linear combination of hI, h2' ha where

hI (t) == e>.t v1 where VI satisfies (A - U)VI = 0

h2(t) == e>.t(tvi + V2) where V2 satisfies (A - AI)V2 = VI
ha(t) == e>.t(t2vI + 2tV2 + 3va) where (A - U)va = V2.

In general Vi satisfies (A - AI) Vi = Vi-l where i = 1,2, ... ,m and m is the arithmetic
multiplicity of A, while CI, C2, Ca are arbitrary constants to be determined by initial
conditions.

Example 5.3. Solve x = Ax where A = [_~ !]

C(A) = IA - UI = (A - 2)2 = 0 i.e. A = 2 is repeated twice.
88

(A - M)Vl = 0 gives - Xl + X2 = 0 or Vl = ( ~)
(A - M)V2 = Vl gives - Xl + X2 = 1 or Va = ( ~) , say.

The solution is

i.e. Xl(t) = cle2t + c2te2t

X2(t) = cle2t + C2(t + 1)e2t for arbitrary Cl and C2.

5.2.3. Case (iii): Complex Eigenvalues

The case of complex roots is covered in Theorem 5.1 and 5.2. If ± = Ax is a

real constant n X n system, with complex eigenvalues >'j = aj ± if3j for some j,
these always come in pairs. Take the two dimensional case to avoid subscripts, the
eigenvalues are >. = a±if3 (i.e. >'1 = a+if3 and >'2 == Xl = a-if3) with corresponding
eigenvectors Vl and V2(= ih), where a = =
r/2 and f3 J48 - r 2/2 as usual. As in
theorem 5.2, the solution is

X(t) = eAt = PeAt p-lxo == PeAtc

== Clvle + C2v2eAt
At
1 3

==Cl Vl e(a+i,B)t + C2V2e(a+i,B)t

==(Cl Vl + C2V2)eat cos f3t + i (Cl Vl - C2V2) eat sin f3t

= eat(hl cosf3t + h2sinf3t) (5.11)

where hl == CIVl + C2V2 and h2 == i(CIVl - C2V2), both real vectors (see Chapter 2,
footnote 1).

Example 5.4. Solve ± = Ax where A = [-! ::::~], c(>.) = 0 gives>. = -1 ± 2i

and the corresponding eigenvectors Vl = ( ~ ) , V2 = ( -~ ) (= vt}, P == (Vl' V2) =

[ 2i -i]
2'
P-1AP -_ A -_ [ -1 0+ 2i -1-02i ] -= [~10 ~20] •
Th I· .
e so utlOn IS

x(t) = PeAt p-lxo == PeAtc where C == p-lxo i.e.

x(t) == clvle A1t + c2v2eA3t
 89

x(t) = Cl ( ~ ) e(-1+2i)t + C2 ( ~i ) e(-l-2i)t

= e- t [Cl (~) (cos2t + isin 2t)] +e- t [~( -;) (COs2t-isin2t)]

-t [ Cl (i cos 2t - sin2t) +C2 (-icos2t - sin2t) ]

= e ~ (2cos2t + 2i sin 2t) +C2 (-isin2t + 2 cos 2t)

=
-
k
1
( - sin 2t) -t k (cos 2t) -t
2C082t e + 2 sin2t e
where kl = Cl + C2 and k2 = i(Cl - ~).

~ 1c(>.) = 0 gives the eigen-

-1 2
Example 5.5. Solve x= Ax where A = [ -1 -1
o 1 -1

(j) , (-~)
n"'.
values and eigenvectors >. = (-1, -1 ± i) and Vl = V2 = +

i ( + iv and '" = '" = • - iv.

The solution, (remembering that e(-l±i)t = e-t(cos t± i sin t)) for the complex pair,
is

e-'(c06t + isint) ( - ) ) +e-'(cost-isint) (~:)

-cos t
=e- t [ -sint
1+ie- [ -C?st
sin t 1
t
[ - cos t 1
+e- t -sint -ie- t [
-sint
cost
1.
cost smt cost sint
The solution of the whole system, after grouping terms is

where Cl, C2, C3 are arbitrary constants to be determined by initial conditions.

5.3 Jordan Canonical Form of ODE Systems

A reduction of ODE systems to their Jordan canonical form by similarity trans-

formation greatly simplifies the solution, especially in the stability analysis. This is
done by using x = Py to transform the original system
x = Ax, x(O) = xo (5.12)
90

to

x = PiJ=APy
iJ = P-lAPy = Jy (5.13)

the solution of which is, by theorem 5.1

(5.14)

where, taking the two-dimensional case for simplicity,

(i) J = [~l ~2] for the case of real distinct eigenvalues

(ii) J = [~i] for the case of repeated eigenvalue

(iii) J = [_~ !] for the case of complex eigenvalue

A= a ± if3 (a, f3 real, i 2 = -1).

It is easy to see that the original form (5.12) and the Jordan canonical form (5.13)
are topologically equivalent: only a change in coordinates is involved, the same
analysis is valid for both.
The three above cases will be examined separately, according to whether the
roots A of C(A) = IA - All = 0 are real and distinct or multiple or complex.

Case (i). Real distinct eigenvalues.

This is the simplest case which has been dealt with in Theorem 5.1 and 5.2. In
its Jordan form, the solution is simply

(5.15)

where J = A = diag (Ai) : a diagonal matrix with eigenvalues At, A2 on the diagonal.
The system is completely decoupled and the solution can be written at sight, as

Yi(t) = Yme>.;t.

To show their topological equivalence, let us examine an example.

Example 5.6. The system x = Ax where A = (~ ~) has eigenvalues A = ±1

and the corresponding modal matrix P = (~ _~) . A change to iJ = Ay by use of

x == Py gives iJ = Ay where A = (~ _~) whose solution is Yl = cle>')t = clet and
Y2 = C2e>'2 t = C2e-t. It is easy to see that this involves only a change of coordinates
(figure 5.1) by 45°
 91

--+--"---I---Xl 1/1

Figure 5.1. A change of coordinates

Clearly the two systems are topologically equivalent: both have the same structure
of Saddle Point instability. If the solution in x(t) is required, a transformation back
to x gives

Example 5.7. Consider the system x = Ax where A = (~ =1) with Xo = (4,8)

in example (5.1). C(A) = (A - l)(A - 5) = 0, P = (i i) == ( ~~ ) = Yo. The

transformation from x = Ax to iJ = p- 1APy = Ay = (~ ~) y gives

Y1 = 3et ¢} Xl = 6e t 2e5t
-
Y2 = _e5t ¢} x2 = ge t _ e5t •
The two systems, as we have seen, are topologically equivalent: both being unstable,
having A = (1,5).

Case (ii). Multiple eigenvalues.

For the system on the plane, C(A) = 0 gives A1 = A2 = A = 7/2 where 7 ==

tr A. By similarity transformation x = Py, where P == [V1' V2] and V1, V2 satisfy
(A - M)V1 = 0, (A - M)V2 = V1, we have

-1
PAP=J= [AOA.
1] (5.16)
92

Note that in general, the non-zero off-diagonal element is not zero: it is some c.
However, it could be transformed into 1 by using Pi == P [~ C~l] instead, i.e.

(5.17)

Thus, x = Ax is transformed into

whose solution is
Y( t ) = eJt Yo = e~t [1
0 1 t] Yo· (5.18)

This is readily seen by using the definition of e Jt as

since e~t = 1 + >..t + >..2ft2f2! + ...

Alternatively, (5.18) could be shown by using the SN decomposition of J, i.e. J ==
S+N where

J=[~ !]==[~ ~]+[~ ~]==S+N

and S, N commute, i.e. SN = NS, which allows us to write eJ = e(S+N) = eSeN •
This commutation can be shown by explicit computation

i.e. the two series coincide if SN = NS, and then e J = eSe N = e S+ N and hence e Jt
can be written as

since N is nilpotent of index 2, i.e. N k = 0 Vk ~ 2.

 93

Example 5.8. Solve x = Ax where A = [_~ !] c('x) = 0 gives (,X - 2)2 = 0 and

the vectors Vb V2 are Vl = ( ~ ) ; V2 = ( ~ ) ; P = [~ ~]; p- 1 AP = [~ ~] .

Thus, in Jordan canonical form, x = Ax is

whose solution is

i.e. Yl (t) = (YlO + Y20t )e2t

Y2(t) = Y20e2t .

Case (iii). Complex eigenvalues.

Consider the system x = Ax on the plane where A is a real constant matrix

having complex eigenvalues ,X = a ± if3 and corresponding eigenvectors Vl and V2.
By the definition of eigenvalue, Av = ,Xv i.e.

A[Vl + iV2] = (a + i(3)(Vl + iV2)

= aVl - f3v2 + i(f3vl + aV2)

i.e. AVl = aVl - f3v2

i AV2 = i(f3Vl + aV2). Dropping i, we have (see eq. 4.37)

A[vl. V2] = [Vl V2] [_p !] i.e.

AP=P J
p- 1AP = J = [_p !] (5.19)

the system has been decomplexified, and x = Ax is now transformed into

whose solution is simply (remembering that e(a±i,B)t = eat (cos f3t ± i sinf3t)) .

(t) _ Jt _ at [ cos f3t sin f3t ] (5.20)

Y - e Yo - e _ sinf3t cosf3t Yo·

Note that, had X= a-if3 been used, we would have J = (~ -~) but the analysis
is not affected. Note also that using the SN decomposition of J as above, and since
94

S, N commute, i.e. SN = NS, we have, as before

J = [~ -!] == [~ ~] + [g -~] == 01 + P [~ - ~ ]
=S+N

eN = I+N+N2/2!+N3/3!+N4/4!+ ...

= 1+P [~ -~] + ~ [-~ _~] + 1T [_~ ~] + 1f [ ~

_ [ 1- p2/2! + P4/4! - P6/6! ... -p + p3/3! _ P5/5!··· ]
- P - P3/3! + P5/5!·.. 1- P2/2! + P4/4! ...

= [cos P -sin p ]
- sinp cosp

by the Maclaurin's expansion of cosp and sinp. Hence

e Jt =eat eNt =eat [

. pt - sin pt ]
COS
smpt cospt

which is (5.20) (using X= 0 - iP). The above analysis can be summarized in the
following theorem:

Theorem 5.4. For a dynamic system on the plane ± = Ax where A is any real
2 x 2 matrix, there exists a non-singular matrix P such that p-l AP = J which is
one of the following 3 types, corresponding to the cases of real distinct, repeated and
complex eigenvalues respectively:

• J --
(';) [O~l "
~2]a n d th e so Iutzon
' 0if'y = J y 's
.

(ii) J = [~ !] and the solution of iJ = Jy is

y(t) = eJtyo = e~t [~ : ] Yo

••• J -- [_~,.,
(';';';) 0(3] an d th
e soiut~on
' 0 if y. = J y .
IS

(t) _ at [ cospt sinpt] (5.21)

y - e _ sin pt cos pt Yo
 95

5.4. Alternative Methods for Solving x= Ax

As we have seen in sections 5.2 and 5.3, the solution of x = Ax, which is
x(t) = eAtxo = peAt p-1xo = c1V1eAlt + ... + c,.vne A• T , involves the computation of
eigenvectors (V1' ... , vn), modal matrices P = (V1' V2, ... , vn ), and their transforma-
tion p-1 AP = J, the Jordan canonical form in (5.21). This could be cumbersome,
especially when A is not diagonalizable. To bypass such computations, several al-
ternative methods have been suggested, some of which are the following.

5.4.1. Sylvester's Method

For the case of n distinct eigenvalues A1 :/: A2 :/: ... :/: An of A in x = Ax,
Sylvester (see Barnett and Cameron 1985) suggested writing eAt = 1:;;=1 Zlre A• t
where
Zir == (A - A1I)(A - A2I) ... (A - AnI) == (A - AjIn) . II (5.22)
(Air - A1)(AIr - A2) ... (Air - An) j_l Air - Aj
j,. .

The solution of x = Ax is then

n
= E ZlreA'txo. (5.23)
1r=1

Example 5.9. Solve x = Ax, Xo = ( ~ ), A = [~2 !3]. C(A) = det(A - AI) =

o gives A = (-1, -2)
Z - A - A2I _
1 = A1 - A2 -
[2-2 -11] .' ~1 ] [ ~ ] = [ : ]
_ A- All _
Z2 = A2 - A1 -
[-1 2
-1
2 ] ; Z2 X O = [-1
2 -1]
2 [ 21 ] = [ -3
6 ]
The solution, by (5.22), is
2
X(t) = E ZlreA.tXO = e- t ZlXO + e-2t Z2XO
1r=1

_
- e
-t [ 4 ] + e-2t [ -3
-4 6]·

Comparing this with the conventional method in 5.2 and 5.3, we find that P =
[Vb V2] = [!2 !2] ; p- 1xo = [~1 ~1] [~] = [:3] and the solution is
identical, with ZlXO == C1V1 and X 2xo == ~V2 i.e.
96

5.4.2. Putzer's Methods (Putzer 1966)

Method 1. Given the characteristic polynomial

C(A) = det(AI - A) == An + Cn_1An-1 + ... + C1A + Co

Putzer (1966) suggested the construction of a scalar function

with initial conditions z(O) = i(O) = ... = zn-2(0) = 0; zn-1(0) = 1 and q = CZ

where

1
C1 C2 Cn -1 1
C2 C3 1 0 z(t)
C= Z(t) == [ i~t)
Cn -1 1 0 0 zn-1(t)
1 0 0
The solution of x= Ax, regardless of possible mutliplicities of eigenvalues, can be
written as
n-1
eAt = E qj(t)Aj (5.24)
j=l
where qo(t), q1 (t), ... , qn-1(t) are the elements of the column vector q = C Z defined
above.

Method 2. Putzer's second method consists of writing the solution as

n-1
eAt = E Tj+1(t)Pj (5.25)
j=O

where Po = I; Pj == rr{=l(A - AkI) (j = 1,2, ... ,n) and T1(t), ... ,Tn(t) is the
solution of the triangular system

1-1 = A1T1
Tj = Tj-1 + AjTj (j = 2,3, ... , n)
T1(0) = 1; Tj(O) = O.

Putzer provided an example of a 3 x 3 matrix with the eigenvalue A of multiplicity

3, whose characteristic polynomial is

C(x) = (x - A)3 = x 3 - 3AX2 + 3A2X - A3

== x 3 + C2 x2 + C1 X + Co
so that Co = _A 3 = detA, C2 = -3A = -tr A, C1 = 3A2 = sum of principal minors
of order 2 (see equation 4.30, remembering that in this example, A1 = A2 = A3 = A).
 97

Method 1 gives

i.e.

and the solution

(5.26)

Method 2 gives

and
1
x(t) = eAtxo = '2e-Xt[2J + 2t(A - >.J) + t 2(A - AI)2]XO. (5.27)
Both methods completely bypass the computation of eigenvectors and the Jordan
canonical form.

5.4.3. A Direct Method of Solving x= Ax

We are suggesting the direct method of writing the solution x(t) = eAtxo explic-
itlyas

(5.28)

The beauty of this method is in its simplicity. It is particularly useful in the case
of repeated eigenvalues of the type of Putzer's example. It is left to the readers to
verify that (5.28) gives exactly Putzer's (5.26) and (5.27) and is obtained in a much
simpler way, using only the definitional property of eA in eq (4.11).
Which method to be used is a matter of taste and convenience, for a given prob-
lem. If interest is in a qualitative solution and stability analysis, the conventional
method of the last 2 sections, giving

is quite adequate since, given certain conditions discussed in the last 2 sections, Vi,
P = (Vl •.• V n ) seldom need to be computed explicitly: CiVi (i = 1,2, ... ,n) being
98

simply constant vectors to be determined by initial conditions, are of no interest to

the stability analysis: the crucial role being played by (AI,' .. ,An).

5.5. Reduction to First Order ODE Systems

An n-th order differential equation (in Chapter 2)

where Dy
order ODE
=y, D2y =ii, ... , Dny =d"y/dtn, could be reduced to a system of n first
x = Ax, x(O} = Xo

by redefining variables as follows

Xl =Y
X2 = Y = Xl
Xa =Y =X2 etc... and writing
Writing A, which is called the companion matrix, as

or, in full,

0 1 0 0 0 Xl (t)
0 0 1 X2(t}
A= and X =
0 0 0 0 1
-an -an-l -an-2 -a2 -al xn(t}
The solution of this, by Theorems (5.1) and (5.2), is

x(t} = eAtxo = PeAt P-lxo. {5.30}

5.6. Fundamental Matrix

Definition 5.2. The n x n matrix

{5.31}
 99

each column of which is an independent solution of x = Ax is called the fundamental

matrix for x = Ax.
Clearly, by definition,
~(t) = A(t)~(t). (5.32)
With this definition, the solution of x = Ax, x(O) = Xo can be written in a compact
form as

x(t) = ~(t)c (5.33)

= Clxl(t) + C2X 2 (t) + ... + cnxn(t)
= linear combination of solution vectors

with

and
x(t) = ~(t)c = ~(t)~(O)-lxO. (5.34)
We have seen (Theorem 5.2) that the solution of x = Ax, x(O) = Xo is

x(t) = PeAt p-1xo

= PeAtc (5.35)
== ~(t)c

Thus the fundamental matrix ~(t) = PeAt in Theorem 5.2 i.e.

~(t) = PeAt = [vle.\lt, ... ,vne.\,.t]

~(O) = PI = P and ~(Otlxo = p-1xo = c.

Example 5.10. Take x = Ax in Theorem 5.1 where A = [; =1] and Xo =

( 48 ) A = (1,5)

Clearly 1/1(0) = (i i) = P and ~(O)-lxO = p-1xo = ( _~) . Thus, in terms of

the fundamental matrix, the solution is
100

5.7. Stability Conditions of ODE Systems

5.7.1. Asymptotic Stability

The solution x(t) of x = Ax is (Liapunov) stable if solutions starting close to it,

will stay close at all future time. It is asymptotically stable if, in addition to the
above, they eventually converge to x. More formally

Definition 5.3. The solution x(t) of x = Ax is said to be (Liapunov) stable if

for a given e > 0, there exists a 8(e) > 0 such that for any other solution y(t), if
Ix(O) - y(O)1 < 8, then Ix(t) - y(t)1 < e Vt > o. It is said to be asymptotically
stable if, in addition to the condition of Liapunov stability above, Ix(O) - y(O)1 < 8
implies liIIlt-too Ix(t) - y(t)1 = O. .
From the solution x(t) = eAtxo of x = Ax, it is clear that the system is asymp-
totically stable if Re(Ai) < 0 for all i. This covers all cases:
(i) Distinct real roots: Im(Ai) = 0 hence Re(Ai) = Ai and it is easy to see that
limHoo PeAtp-lxo = 0 if Ai < 0 for all i.
(ii) Repeated roots: (5.17) Yl (t) = (Cl + c2')'t)e,xt which shows that the exponential
term e,xt dominates the linear term C2')'t and Yl (t) --+ 0 as t --+ 00 if A < o.
(iii) Complex roots: x(t) = eQt(cl cos (3t + C2 sin (3t). Clearly the perpetual fluctua-
tions caused by cos (3t, sin (3t will explode if a > 0, die down if a < 0 and go on for
ever if a = O. This case (a = 0) has a neutral stability, i.e. limt-too (x(t) - x e ) $ €
(some € > 0). Clearly a == ~ = Re(A), and a < 0 ¢} Re(A) < 0 (for the 2 x 2 case).

In the case of real diagonalizable matrices (with distinct roots), Ai < 0 for all i
amounts to saying that A is negative definite (see Chapter 4) or that the principal
minors of A of order r have the sign (-lY (r = 1,2, ... , n). In Economics, the
matrix A having this property is called Hicksian matrix. It is in this sense that
a matrix A with Re(Ai) < 0 is called a stable matrix by some authors (Lancaster
1969), which is, of course, true only for differential equations systems: for difference
equation systems Xt = AXt-t. A is a stable matrix only if IAil < 1, not Ai < 0,
for all i. This fundamental condition Re(Ai) < 0 has been studied extensively by
economists such as Arrow and Hurwicz (1958, 1959, 1960), Hahn (1962), Negishi
(1962), Newman (1959-1960), Basset et al. (1967) Quirk and Ruppert (1965) and
many others and stated in a variety of ways in relation to economic problems (for
example gross substitutes, complementarity of commodities). Matrices fulfilling
some conditions are referred to, for example, as Metzlerian (if aij < 0 Vi = j and
aij > 0 Vi ¥ j), dominant diagonal or McKenzie (1960) matrix, and theorems such
as "a Metzlerian matrix is stable if it is Hicksian" etc... As these are all but too
familiar to economic students, we shall not go into them, except to mention the
widely referred to "Routh-Hurwitz" test. This says that given a system :i: = Ax
with c(A) = IA - AIl = An + a1An-l + a2An-2 + ... + an = 0, Re(Ai) < 0 for all i
 101

iff the following principal minors ~b ~2' ••• ' ~n formed by a; (i = 0,1, ... , n with
ao = 1) are all positive, where

al 1 0 0

I
1
I,... '~n
a3 a2 al
1
~l = al, ~2 = al = as a4 a3 a2
a3 a2
a7 as as a4

Note that am = 0 Vm > n in the construction of the above ~; for all i.

5.7.2. Global Stability: Liapunov's Second Method

The above asymptotic stability conditions only guarantee local stability of sys-
tems starting near equilibrium, unless, of course, these are linear with constant
coefficients, in which case, they are both locally and globally asymptotically stable
if ReA; < 0 Vi and neutrally stable if ReAi = 0 # 1m Ai Vi. For nonlinear systems,
this need not generally be true. A global stability test is then provided by Lia-
punov's second method which consists in showing, without explicit solution of the
ODE system, that the distance between x{t) and its equilibrium x shrinks overtime.

Definition 5.4. A real valued differentiable function V(x) in the neighbourhood V

of x set at the origin for simplicity i.e. x = 0, such that V(x) ~ 0, V(O) = 0 i.e.
V(x) = 0 iff x = x(= 0), is called a Liapunov function.
Theorem 5.5. The system i = Ax is globally stable iff, for some positive definite
matrix W, the equation A'V + V A = - W has a positive definite matrix V.

Proof. Differentiate v( x) == x'V x,

v(x) = i'Vx + x'Vi
= x'A'Vx + x'VAx
= x'(A'V + V A)x
=x'(-W)x<O. (QED)

In practice, we can take W = 1 and solve A'V +VA = -I. For example
A= [~1 !4],A=(-I,-3),A'V+VA=-/givesV= [~~~ ~~n which is
positive definite. In detail,
-1 -1

[~ ] [Vl1
-4 o
0 -1 Vl2 ] [ -1
O ] . Vl1 ]
[ Vl2 [ 5/6]
1/2. 5/6 1/2
o -4 -1 V2l = 0 gIves V2l = 1/2 I.e. V = [1/2 1/2]
3 3 -8 V22 -1 V22 1/2
102

5.8. Qualitative Solution: Phase Portrait Diagrams

Consider the simple (non-singular) real linear ODE system in the plane
.i = Ax (5.36)
in its Jordan canonical form (see Section 5.3)
iJ = Jy (5.37)
where J takes one ofthe following forms (Theorem 5.4)

(i) (~1 ~2) (ii) (~ l) (iii) (_p !)

according to whether the characteristic equation C(A} == IA - >.II = A2 - T A+ fJ = 0
has (i) 2 real distinct roots Al and A2; or (ii) a repeated root Al = A2 = A = T /2
and (iii) complex roots A = Q ± ifJ where Q == T/2, 2fJ == ./4fJ - T2 and T == trA,
fJ == detA.
Clearly the critical or equilibrium point for which 2: = 0 is the origin (O,O).
We shall analyze the qualitative properties of this equilibrium in its normal form
(5.38) by use of phase portrait diagrams. As has been noted, (5.37) and (5.38) are
topologically equivalent but (5.38) gains in simplicity.
Case (i) Real, distinct eigenvalues AI! A2 with J = (~ ~2) . In its canonical
form, the system is decoupled and the solution is Yi = e;e>-;I (i = 1,2) which tends
to 0 (oo) over time if Ai < O(Ai > 0). If A2 < Al < 0, Y2 goes to the origin faster
than Yl does, and vice versa. The origin is called a node, a stable one. (See figure
5.2).

----;;;..~-----.. YI

Figure 5.2. Node

The arrows will be reversed in (a) if 0 < Al < A2 and in (b) if 0 < A2 < AI. This is
an unstable mode. In the limit, if Cl '" 0,
Y2 = C2 e(>-2->-I)1
Yl Cl
 103

tends to 0 as t -t 00 if A2 < Al < 0 : the trajectory is tangent to the horizontal axis

near the origin {see figure 5.2}. If CI = 0 :/= C2, {Yl. Y2} = {O, C2 e.\lt} , i.e. YI stays at
the origin while Y2 moves along the vertical axis, from the origin if A2 > 0 and to
the origin if A2 < o. Similarly for C2 = 0 :/= CI, mutandis mutatis.
If eigenvalues are of opposite signs, say Al < 0 < A2 then YI moves into the
origin along the horizontal axis while Y2 moves away the origin along the vertical
axis. This is called a Saddle Point {see figure 5.3}. Note that in both cases, the
vertical and horizontal axes are separatrices, separating the phase curves.

/
f/2 f/2

~ ~ Yl
~ Yl

\ f '\ (
(a) .xl < 0 < .x2 (b).x2 <o<.xl

Figure 5.3. Saddle Point

Case {ii} Equal roots Al = A2 = 7/2 = A, J = (~ ~) .

The equations, in normal form, are

ill = AYI giving YI = CI eM

.
Y2 \ .glvmg
= /'YI + "Y2 . Y2 = {C2 + CI/,t }M
e . {5.38}

The trajectory passes through {CI' C2} at t = 0 and tends to 0 as t -t 00 if A < 0

and to 00 as t -t 00 if A > O. If CI :/= 0,

tends to 00 if/,> 0 (and to -00 if/, < 0), i.e. in the limit as t -t 00, and the
trajectory comes home, this will be tangent to the Yraxis if /' > 0 and A < O.
Similarly, the arrows will reverse direction if A > O. See figure (5.4). The origin is
an improper node.
104

().1 < 0 < 'Y) (). > 0)

Figure 5.4. Improper Node

If Al = A2 == A = T /2 and "y = 0, i.e. A is a diagonal matrix itself, the trajectories

move along straight lines, towards the origin if A < 0 and away from it if A > o.
The origin is a star (see figure 5.5).

112 112

~/ III ....--~~--..... 1I1

/~ ().I < 0) (). > 0)

Figure 5.5. The Star

C~e (iii) Complex roots A = a ± ifJ, J = (_p !) .If a", 0 '" fJ, the canonical
form gives

ill= aYl + fJY2

Y2 = -fJYl + aY2· (5.39)

In polar coordinates, with Yl = rcosO, Y2 = rsinO, r2 = yr + y~, tan = Y2/Yl.°

 105

112

--~~~----~------------lIl

Figure 5.6. Polar Coordinates

Time differentiation of r2 gives

Dividing by 2 and substituting from (5.40) give

rr = a(y~ + y~) = ar2

r= ar. (5.40)

Similarly, time differentiation of tan () gives

2 2 ()(). • •
or Yl sec = YIY2 - Y2Yl·

Substituting from (5.40) and remembering that (sec2 ())y~ = r2 = y~ + y~, we have
r 2iJ = -fl(Y~ + y~) = -flr2
iJ = -fl
()(t) = ()o - flt. (5.41 )

These two equations (5.40) and (5.41) give complete information on the trajectory.
Three cases should be distinguished.

(a) a < 0 < fl: r(t) shrinks by (5.40) and ()(t) by (5.41) i.e. as the radius r decreases
over time, the system moves closer to the origin in a clockwise fashion because angle
() decreases over time (see figure 5.8). The origin is thus a stable focus or spiral sink.
If a,fl < 0, the motion is anticlockwise (see (iii))
106

(i) a < 0 <,8 (ii) a,,8 >0 (iii) a,,8 < 0

Figure 5.7. Focus

(b) a, {3 > 0: r increases over time i.e. the system is winding out of the origin while
() decreases, i.e. it is spiralling out of the origin in a clockwise fashion. The origin
is unstable (see figure 5.7 case (ii)). The opposite is true for a,{3 < 0 (see figure 5.7
case (iii)).
(c) a = 0 < {3 : r remains constant over time while () decreases: the trajectory
is moving on a closed circle in the clockwise direction. If {3 < 0 = a, r remains
constant and the trajectory is anticlockwise. The origin is a centre: it has a neutral
stability (see figure 5.8).

--+--+---+--1/1 --+--+--+--1/1

(a = 0 <,8) (,8 < 0 =a)

Figure 5.8. Centre

The above analysis could be summarized and presented in the parameter space
T·6 of c(,x) where c(,x~ ~ IA - .xII = ,x2 - T,x + 6 = 0 (where T == tr A, 6 ==
detA), ,x(T,6) = i(T± T - 46) == i{T±J~). The 6 = 0 locus where 6 = T2/4 is
a patabola above which 6 < 0, c(.~) has complex roots causing periodic fluctuations
 107

and below which A > 0, C(A) has real roots, causing monotonic movements. (see
figure 5.9). The system is stable on the left of the vertical axis (where T < 0) and
unstable on the right (where T > 0). Below the horizontal axis, 6 < 0 (i.e. 6 =
AIA2 < 0 indicating that eigenvalues are of opposite signs): the system exhibits a
saddle point instability.

* *
Stable Unstable

~
Nodes

~
Nodes
r' _ tr A

j~(
P~
+./ ~ -f.
»«
' . ,~"

\ /
,'~" S.P . ,~~
•• ODLf

Figure 5.9. Parameter space of ± = Ax

5.9. Some Economic Applications

Differential equations systems have been widely applied in Economics. We shall

choose only some typical examples.

5.9.1. The dynamic IS-LM Keynesian Model

lonsider a simplified Keynesian model in which national income (Y) responds

to excess commodity demand i.e. to the excess of investment (1) over saving (S),
and interest rate (r) responds to excess money demand L(Y, r), also called liquidity
108

preference, over exogenously determined money supply (M) i.e.

Y= hi (I - 5)
r = h2 [L(Y, r) - M] (5.42)

where 1 = 10 - ar = investment function

5 = 5 p + 5 g == s(Y - T) + (T - G) = saving function

5p = private saving = a constant proportion s(O < s < 2)
of disposable income (Y - T) and
5 g = government saving = Tax (T) minus expenditure (G),
both assumed exogenously given
hi = positive constant speeds of adjustment (i = 1,2)
(hi = 1 = h2 for simplicity).
L(Y, r) = liquidity function = transactions demand (kY)
and speculative demand (-fJr)
M = exogenously determined money supply.

All coefficients a, fJ, k, s are positive constants.

Substitution gives a system of two first order linear d.e. :i; = Ax - b where
T _ (
X - Y, r ) , A = (-8k-/3
_ -0)
( ~) = [-: =~] [~ ]-[ (1 - f- G] (5.43)

c('\) =,\2 - r'\ + ~ ==,\2 + (s + fJ)'\ + (sfJ + ak) = 0 where r == tr A; ~ == detA.

,\ = !2 (r ± vr2 - 4~) == !2 - (s + fJ) ± V.I(-s - fJ)2 - 4(sfJ + ak))
1
= 2 [-fJ - s ± v'X] where ~ == (fJ - s)2 - 4ak.

The solution is

x(t) = eQt(xo - x e ) + Xe = PeAt p-i(xO - Xe) + Xe

where Xe = A-ib and b is the column on the RHS of (5.44). Clearly r = -(fJ + s) <
o : the model is stable and ~ = fJs + ak > 0 : the two eigenvalues are of the same
sign, both negative.
If ~ == r2 - 4~ > 0 i.e. (s - fJ)2 > 40k : c('\) = 0 has two distinct real roots if ~ = 0,
i.e. (s - fJ)2 = 4ak, c('\) = 0 has one repeated root
if ~ < 0, i.e. (s - fJ)2 < 4ak, c('\) = 0 has complex roots.
In the particular cases where (i) s = fJ i.e. the marginal propensity to save is
equal to the coefficient of the interest elasticity of speculative money demand, ,\ =
-s ± iM : the trajectory is a stable focus, and (ii) a = k, i.e. the transaction
 109

demand function has the same slope as the Investment function (in absolute value),
A = -8 ± io: and the system is a stable focus again (see figure 5.7 and 5.9).

5.9.2. Dynamic Leontief Input-Output Model

A Leontief economy has n sectors each producing only one commodity, with a
non-negative, non-singular constant input-output coefficient matrix A == [aij] where
aij = output i used up per unit of commodity j, 0 ~ aij < 1 and a constant non-
negative, non-singular matrix B == [bij ] where bij is the output i required to build up
one unit of capacity j, 0 ~ bij < 1 (i, j = 1,2, ... , n). The economy must produce
enough to satisfy intermediate demand (Ax), investment demand (Bx) and a final
consumption target (e), i.e.

x(t) = Ax(t) + Bx(t) + e; x(O) = Xo.

Rearranging
(5.44)
This is a system of n first order constant coefficient O.D.E. The solution of which,
by Theorem 5.3, is

x(t) = eB - 1 (I-A), (xo - x e) + xe

= PeAt p- l (xo - x e) + Xe (5.45)

where Xe == xp = (1 - A)-l BB-le = (1 - A)-le = particular integral or equilibrium

Xe and A == diag (Ai) where Ai = eigenvalue i, (1 ~ i ~ n) assumed all distinct, of
B-l(I - A) which is to be examined.
First note that in a healthy, productive economy, 0 ~ aij < 1 for all i,j, and
1 - A is in class Z, the class of all real square matrices whose off diagonal elements
are all non-positive (see Fiedler and Ptak 1962, p. 386) and hence by their Theorem
4.3, (1 - Atl ~ 0 (> 0 if A is irreducible which we assume for definiteness.). This is
precisely the Hawkins-Simon's (1949) conditions. If B = 1 or B = [bii] = a positive
diagonal matrix, B-l(I - A) E Z and we are done: all eigenvalues of B-l(I - A)
are positive by Fiedler and Ptak's Theorem 4.3, and the economy is growing. If
B is a positive but a non-diagonal matrix, B-l(I - A) > 0 : the economy is still
growing, as has been shown by the analysis of the 1950's as follows: M == (I _A)-l B
is a positive matrix, being the product of a positive matrix (I - A)-l by another
positive matrix B. Hence, by Perron-Froebenius (see Gantmacher 1959, p. ,65), M
has a simple positive eigenvalue p,* larger in modulus than any other eigenvalue p,
and a unique corresponding eigenvector v* with no other non-negative eigenvectors.
But B-l(I - A) == M-l with eigenvalue A = 1/p, (see Chapter 4) and if p,* > 0, so
is A* = 1/p,* > 0 i.e. the economy is growing.
In the closed model (with e = 0), (5.45) is

(5.45a)
110

and the corresponding price system, in row vector, is

p=pA-pB
which says that output price p includes current costs of production, pA, net of capital
gains pB. If prices are rising (falling) the gain (loss) in value, pB, is deducted from
(added to) costs. Thus we have the dual
p= -p(I - A)B- 1 • (5.46)
Note that the primal B-l(I - A) in (5.45a) and the dual (I - A)B-l systems
have the same eigenvalues. To see this, let A be the eigenvalue of (I - A)B- 1
i.e. (I - A)B-1x = AX and let X == By (or y = B-1x). Clearly (I - A)y = ABy or
B-l(I - A)y = AY, and thus (I - A)B-l and B-1(I - A) have the same,eigenvalue
A (although they have different eigenvectors x and y). This led Jorgenson (1960)
to the conclusion that if the output system (x) is stable, its dual, the price system
(P) is unstable and vice versa. This is a devastating conclusion. It left Jorgenson
(1961), the following year, to try to remedy the problem in many ways, in order to
salvage the Input-Output theory, by introducing an explicit maximization principle,
an irreversibility of capital accumulation and excess capacity assumption. I think
this dual instability arrived at by solving x and p systems separately will turn out
to be the familiar Saddle Point solution, if both systems are solved simultaneously.
To see this, let us write the price system with interest rate r, treated as the only
parameter, taken into account explicitly (Jorgenson 1961, p. 109) as
p = A'p + rB'p - B'p
and putting C == B-1(I - A), D == (B-1)'(I - A'), write the whole system as

[: ] = [~ -D ~ rIn ] [ ; ].

Note that C and D have the same eigenvalues since C == B-1(I -A) and (I -A)B-l
have the same eigenvalues as already noticed and D == (B-l),(I - A') being the
transpose of (I - A)B-l also has the same eigenvalues. In Jordan canonical form
(see eq. 5.13), using the transformation x =
Py and p =
Pq, we have p-1CP =
p- 1DP = A = diag(Al, ... , An), and

[~]=[~ -A~rIn][~]
== Mr [ :]

where Mr == [~ -A ~ rIn ]. Clearly for r = 0, Mo = [~ ~A] has 2n eigenvalues

Ai (i = 1,2, ... , 2n) of opposite signs, i.e. the spectrum of Mo, a(Mo), is symmetric
about the imaginary axis of the complex plane. Writing Mr as

where
 111

we can see that u(Mr) = u(Mr) + r/2 i.e. the spectrum of Mr is the spectrum
of Mr shifted to the right by r/2. Writing a typical eigenvalue of Mr as Aj{r) =
±Ctj(r) ± i{3j(r) with {3j(r) = 0 for real Aj and Ctj(r) = 0 for pure imaginary Aj
(ignoring possible multiplicity of Aj for simplicity), we can see that the symmetry
property of Mr is preserved but Mr's symmetry is lost through the perturbation
term r I, and several interes~~nf problems for investigation arise: if for some r = r*,
Ctj(r*) = 0 :/: {3j{r*) with da~:' :/:
0 we have a Hopf bifurcation (to be discussed in
Chapter 9). If Ctj(r*) = 0 = {3j(r*), then one real eigenvalue Aj(r*) becomes zero,
and the system could be analysed more simply by the Centre Manifold theorem.
In both cases, there is a loss of structural stabiiity (see Ch. 9). All this required
further analysis in vastly different directions from Jorganson's 1961 paper.
For the open system (5.45), the corresponding price system is
p = pA + rpB - pB + wao
which says that output price vector p includes current costs pA, interest cost rpB
(r is interest rate), labour costs wao less capital gains (or losses) pB, i.e.
p= -p(I - A - rB)B- 1 + waoB-1. (5.47)
It can be shown (see Jorgenson (1960) that this has negative eigenvalues and the
solution tends to
p = wao(I - A - rB)-l.

5.9.3. Multimarket Equilibrium

Consider an economy with n commodities x = (Xl. ... , xn) and their price vector
p = (Pl,P2, ... ,Pn)' In each market, there is a demand function Di(P) and supply
function Si(P) (i = 1, ... , n). Multimarket equilibrium is said to prevail if each
market i is cleared i.e. the excess demand Ei(P) = Di(P) - Si(P) for commodity i is
zero in each market i (1 :5 i :5 n), and thus, for the whole economy,

This equilibrium is arrived at by tatonnement: at an auctioneer's announced price

vector p, buyers and sellers decide on their volume of transaction. If there is a
shortage (surplus), a new higher (lower) price will be announced at which buy-
ers and sellers will again adjust their plans, and so on, until a price is arrived at,
which will clear all markets. At that point exchange will take place. This is Wal-
ras' tatonnement, as against non-tatonnement where trade takes place even out of
equilibrium. More precisely, the dynamics of price adjustment is
pkE(P) = k[D(p) - S(P)] = kAp (5.48)
where k = diag (ki ) (i = 1,2, ... , n)
A = constant real n x n matrix (D and S are assumed to be linear functions).
112

Take k = I i.e. ki = 1 for all i, for simplicity, this is just P= Ap, p(O) = Po, a system
of linear first order O.D.E. whose solution, by Theorems 5.1 and 5.2, is

(5.49)

where A == ~ == diag (Ai) and Ai = eigenvalue i, assumed distinct, of A.

Extensive research has been focusing on the properties of A. The main findings
are
(i) Equilibrium is locally stable if Re(Ai) < 0 for all i. This is the case when A
is Nikaido's (1968) N.P. matrix or Hicksian matrix, i.e. a matrix whose principal
minors of odd order are negative and of even order, positive.
(ii) Equilibrium is locally and globally stable if A is a real negative semi-definite
matrix.
(iii) Equilibrium is locally and globally stable if A is a negative diagonal or quasi-
dominant (i.e. cilaiil > L#i Cjlaijl for all i and Ci > 0). See McKenzie (1960).
(iv) Equilibrium is locally and globally stable if all commodities are gross substitutes,
in which case aii < OYi and aij > OYi i= j.
(v) Equilibrium is globally stable if E(p) obeys the law of Weak axiom of revealed
preference and Walras' law.
For some major references, see Arrow and Hurwicz (1958) Arrow, Block and
Hurwicz (1959), Metzler (1945), Newman (1959), McKenzie (1960), Quirk and Rup-
pert (1965), Hahn (1958), Arrow and McManus (1958), Negishi (1962), Samuelson
(1941 ).

5.9.4. Walras-Cassel-Leontief General Equilibrium Model

The linear model of general equilibrium, cast in the framework of the static
Leontief model by Dorfman, Solow and Samuelson (1958), has been analyzed by
Morishima (1960) in a dynamic setting. We shall briefly present Morishima's model
to illustrate an important economic application of first order ODE systems.
Consider an economy with n goods x = (Xl, X2, ... , xn) with their prices p =
(Pl,P2, ... ,Pn) and m + 1 primary factors r = (rl' r2, ... , r m, ro) with their rental
v = (Vl,V2, ... ,Vm ,vo). Let A = [aij] be an n x n constant input coefficient matrix,
assumed non-negative and indecomposable and B = [b ij ] be an m x n constant non-
negative factor coefficient matrix. The (consumption) demand function c(p, v) and
factor supply function r(p, v) are both assumed to be homogeneous of degree zero
in p and v, as is usual in general equilibrium models, and to obey the weak axiom
of Revealed Preference (WARP), i.e. if (Po, vo) =f (PI, VI) then

p~~C - v~~r ::; 0 => p~~c - v~~r <0 (5.50)

 113

Given the "budget constraint" which says that the outlays on goods, ric, are
identically equal to the income from factor services, v' r, i.e.
p'c(P,v) == v'r(p,v) (5.51)
general equilibrium is obtained when the goods market and factor market are both
cleared and no abnormal profit is made, i.e.
x = Ax + c(p, v) (5.52)
Bx = r(p,v) (5.53)
p = A'p+ B'v. (5.54)
The general equilibrium flavour is thus introduced to the conventional Leontief model
by way of the demand c(p, v) and supply r{p, v) functions which, instead of being
exogenously given, are now function of product and factor prices (p, v).
Morishima then introduced the dynamics into the model by requiring that
(i) output prices rise in response to excess demand in the goods market;
(ii) factor prices rise in response to excess demand in the factor market;
(iii) production rises in response to the excess of price over cost, i.e. to the emergence
of abnormal profit, i.e.
Hp = Ax+c(p,v)-x
Kv = Bx - r(p,v)
x'M =p' -p'A-v'B-bo
where H, K and M are diagonal matrices whose diagonal elements hi, ki and mi are
all constant positive speeds of response.
As an illustration of an economic application, let us analyze, following Mor-
ishima, a simpler model where (i) price adjusts to maintain eqUilibrium in the goods
market i.e.
p = Ax + c(p, v) - x = 0
giving
x = (l- A)-lc(p, v) (5.55)
and (ii) output adjusts to maintain equality between price and costs i.e. to ensure
the absence of abnormal profits i.e.
x'M=p'-p'A-v'B-b~=O
giving
p' = v' B(/ - A)-l + b~(/ - A)-l (5.56)
where
b~ == (bOl' b02 ,' •. ,bon).
With these two markets in equilibrium, we can eliminate x and p from the above
two equations and write
Kv = Bx - r(p, v)
= B(/ - A)-lc(v) - r(v) (5.57)
114

which is a system of first order ODE in v.

To show that the system is globally stable, at the equilibrium point (x* ,p*, v*)
where
x* = (/ - A)-lc(p*, v*)
Bx* - r(p*, v*) = 0
p* I = v* I B(/ _ A)-l + b~(/ _ A)-l (5.58)
we shall write (5.47) as
KiJ = B(/ - A)-l~c- ~r (5.59)
where ~c = c(v) - c(v*) and ~r = r(v) - r(v*) and define the Liapunov function as

2V = (v - v*)' K(v - v*). (5.60)

Differentiating and substituting from (5.60) gives

v = (v - v*)'B(/ - A)-l~C- (v - v*)~r. (5.61)

From the budget identity conditions p'C == v'r, we have

v'B(/ - A)-lc(v) = b~(I - A)-lc(v) - v'r(v) - ro(v) == o.

Hence
v' B(I - A)-l ~c + b~(/ - A)-l ~c - v' ~r - ~ro = o. (5.62)
But by the WARP (5.51),

v' B(/ - A)-l ~c + b~(/ - Atl ~c - v' ~r - ~ro < 0 (5.63)

if
v* I B(/ - A}-l ~c + b~(I - A)-l ~c - v* I ~r - ~ro ~ o. (5.64)
Since (5.64) contradicts (5.63), the LHS of (5.65) must be positive. Subtracting this
from (5.63), we get

(v - v*)' B(/ - Atl~c - (v - v*)' Ar < o. (5.65)

But (5.66) is the RHS of (5.62). Hence V < 0 and the Walras-Cassel-Leontiefsystem
is globally stable.
Chapter 6
First Order Difference Equations Systems

In view of their similarity with ODE systems in Chapter 5, difference equations

(d.e. ) systems only need a brief treatment. In this chapter, we shall briefly discuss
constant coefficient linear systems of first order d.e., their solutions in the various
cases, the reduction to first order systems, stability conditions, phase diagrams and
some economic applications.

6.1. First Order Linear Systems

A typical homogeneous system is

Xt = AXt-l. x(O) = Xo (6.1)

and non-homogeneous system is

Xt = AXt-l + b, x(O) = Xo (6.2)

where A is an n x n real matrix.

Theorem 6.1. The solution of Xt = AXt-t. x(O) = Xo in {6.1} is

(6.3)

Proof. By iteration for t = 1,2, ... ,n,

Xl = Axo
X2 = AXl = A2xo

(QED)

If A is diagonalizable, which is the case of distinct eigenvalues or of repeated

eigenvalues whose arithmetic multiplicity is equal to geometric multiplicity (see
Chapter 4), (6.3) can be expressed in a more useful form as in theorem 6.2.

Theorem 6.2. If A is diagonalizable, the solution {6.3} can be expressed as

Xt = Atxo = pNp-lxo (6.4)
:= C1V1A~ + C2V2A~ + ... + CnVnA~ (6.5)
116

Proof. If A is diagonalizable i.e. the matrix of eigen vectors P == [VI, V2,"" vn ] is

non-singular, P-IAP = A, A = PAP-I, A2 = (PAP-I)(PAP-I) = PA2p- 1 etc ...
and we have

Xt = Atxo = PAtP-Ixo (6.4)

== CIVIA~ + C2V2A~ + ... + CnVnA~ (6.5)

where Ci = element i of vector C == p-Ixo (I :5 i :5 n); Vi = eigenvector i associated

with eigenvalue Ai.
In scalar notation, (6.5), for each Xi{t), is just

(6.6)

where k ji == CiVji, where Vji is element i of eigenvector Vj (i,j = 1,2, ... , n), is a
constant to be determined by initial conditions.

Theorem 6.3. The solution of the non-homogeneous system Xt = AXt-1 +b, x(O) =
Xo in (6.2), is

Xt = At{xo - xe) + Xe (6.7)

or Xt = PAt p-l(xO - xe) + Xe (6.8)

where Xe == (I - A)-lb is the equilibrium (or particular solution xp) of x, assuming

(I - A) is non-singular and A is diagonalizable in (6.7).

Proof. By iteration,

Xl = Axo +b
X2 = AXI + b = A{Axo + b) + b
A2xo + Ab + b
X3 = A3xo + (I + A + A2)b, and so, for any t,
Xt = Atxo + {I + A + ... + At-l)b.

But (I + A + ... + At-I) == (I - At)(I - A)-l (II - AI '" 0) since (I + A + ... +

At-I)(I - A) = I - At.
Substitution gives

Xt = Atxo + (I - At) (I - Atlb

= At[xo - (I - A)-lb] + (I - A)-lb
== At{xo - xe) + Xe which is (6.7).
Since A is diagonalizable by assumption, a similarity transformation gives p- l AP =
A == diag (Ai), or A = PAP-I, A2 = PA 2p- I , ... ,At = PNP- l , (6.7) gives

Xt = At(xo - xe) + Xe
= PAt p-l(xO - xe) + Xe
which is (6.8). (QED)
 117

Alternative Proof. A simpler proof of Theorem (6.3) can be given by working

with the deviation of Xt from its equilibrium Xe, i.e. by defining Yt == Xt - Xe or
Xt = Yt + Xe where
Xe = (I - A)-lb
Xt = AXt-l + b
= Yt + Xe = A(Yt-l + xe) + b
Yt = AYt-l - (/ - A)xe + b
= AYt-l + 0 since (/ - A)xe = b

which is the homogeneous system (6.1) the solution of which is

Yt = AtYo.

A transformation back to Xt gives (6.8). (QED)

Example 6.1. Solve Xt = AXt-l where A = [: ~], given Xo = ( ; ); C(A) =

IA - All = (A - 3)(A - 2) = 0 gives P = (! ~); p-l = (_! ~) and p-1xo =

(-i)· The solution, by (6.4) is Xt = PNP-1xo = (! ~) (~ ~) (-i) =

1 (!) 3 -3 (~) 2t ==CIVIA~ +C2V2A~.
t

Example 6.2. Solve Xt = [-i _;] Xt-l + [ ! ] ;Xo = ( ! ). C(A) = IA - All =,

(A' + 1)('A + 3)-0· - 3 -1]
- gives p_[-l l '.p-l_[ 1/2 -1/2
- -3/2 1/2].,xe -(I
- - A)-lb-
-
1
TO [37 31] [ 42 ] -_ [ 11 ].,c =
_ Xo - xe -_ ( 43 ) - (1)
1 -_ ( 32) ' p-l C _
-
5/2]
[ -9/2 .
The solution, by (6.7) is

6.2. Jordan Canonical Form

The above theorems are valid for all cases. The case in which A has n distinct
(real or complex) eigenvalues is obvious: the n corresponding eigenvectors are inde-
pendent and A is completely diagonalizable. They are valid for the case of repeated
eigenvalues, so long as the arithmetic multiplicity is equal to the geometric multiplic-
ity: A is completely diagonalizable since the n eigenvectors are linearly independent.
118

They are equally valid for the case of defective matrix A (see Chapter 4) where for
some Ai repeated k times, the geometric multiplicity is less than k: a non-singular
matrix P can always be found to block-diagonalize A i.e. to bring A to its Jordan
canonical form J where p-l AP = J and J is a block diagonal matrix
Al

Ai 1 0
Ai 1
Ai
Clearly the case of complete diagonalizability emerges as a particular one where
J = A == diag (Ai).
Canonical forms are simpler to analyze especially when stability and qualita-
tive solutions are involved: the original and canonical systems being topologically
equivalent, a mere change of coordinates is often all that is involved.
We shall examine the cases of real distinct roots, multiple roots and complex
roots of c(A) = IA - Ail = 0 separately.

Case (i). Real Distinct Eigenvalues.

In this case, eigenvectors are linearly independent and A is completely diagonal-

izable p-l AP = A. Given the system (6.1) Xt = AXt-l, the canonical form can be
brought about by a change of variable Xt == PYt (or Yt = p-lXt). Substituting into
(6.1) gives

Xt = PYt = APYt-l == AXt-l

Yt = p- l APYt-l == AYt-l == JYt-l. (6.9)
The solution of which is
(6.9)'
i.e. Yi(t) = YiOA~ (i = 1,2, ... , n).

Example 6.3. Xt = AXt-l, A = [: ~] ,Xo = [ ~ ].

In its Jordan canonical form, Xt = AXt in Example 6.1 above, is simply

Yt = At Yo = [30t 0] [-1]3 ·
2t

~here Yo == p-lxo = [_~ ~] [ ~ ] = [ _! ]. A transformation back to Xt = PYt

glves

Xt = PYt = [! ~] [~ gt] [ _~ ] = ( ! ) 3t - 3 ( ~) 2t.

 119

Case (ii). Multiple Eigenvalues.

If A in Xt = AXt-l has some eigenvalue Ai repeated mi times, its solution in

Jordan canonical form, as obtained by use of Xt = PYt (or Yt = p-1Xt) is

Yt = p-l APYt-l == JYt-l

,xl
o
where J = . For simplicity, let us take the 2 X 2 case.
,xi 1 0
o ,xi 1
,xi
The characteristic equation C(A) = IA - All = A2 - rA + 8 = 0 gives Al = A2 =
r/2 = A, and (6.9) gives

Yt = JYt-1 == [~ !] Yt-I (6.10)

where Xt = PYt and P == [VI, V2] chosen such that (A - >.J)VI = 0, (A - AI)v2 = VI (in
general, (A - >.J)Vi = Vi-I (i = 1,2, ... ,mi) where mi is the arithmetic multiplicity
of A;). Thus (6.9) has been reduced to a first order d.e. system (6.10) whose solution
IS

(6.10)'

where Yo = P-Ixo. In fact, (6.10) being a triangular matrix system, the last equation
could be solved at sight, Y2(t) = AtY20, and substituted to the first (in general, to
the second last, third last etc. recursively).

Example 6.4. Solve Xt = AXt_1 where A = [~ -;]; Xo = [~] ; C(A) =

(A - 2)2 = 0, (A - AI)VI = 0 gives VI = [-~] and (A - AI)v2 = VI gives

[-~ -~][:~] [ -~ ] or V2 [ ~ ] , P == [VI V2] = [-~ ~] = p- I ; p- IAP =

[~ ~] ; p-I xO ( -; ) = Yo. The solution is

Yt = Jt Yo = [~ t2~~ I ] [ -! ]= [ (-1 ~ 3t/ 2) ] 2t.

In fact, the second equation could be solved at sight, as Y2(t) = 2tY20 = 21(3) and
substituted into the first equation to give YI(t) = 2YI(t - 1) + Y2(t - 1) or

+ 1) = 2YI(t) + 2t(3)
YI(t
whose solution is YI(t) = (YlO + tY2o/2)2t = (-1 + 3t/2)2t where Yo == p-I XO =
[-~ ~] [ ~ ] = [ -; ] == ( ~~: ) .
120

Case (iii). Complex Eigenvalues.

When A in Xt = AXt-l has some complex eigenvalues Aj, these come in pairs
Aj = Ctj ±i{3j where Ctj and (3j are real and i 2 = -1. Take the 2 x 2 case for simplicity:
C(A) = IA->.II = 0 gives A = Ct±i{3 where Ct == r/2 and {3 == ';48 - r 2 )/2, both real
numbers. A change to polar coordinates Ct = r cos (), {3 = r sin () gives the standard
basis of no
as

J = [_~ ~] = r [_~~~: :~~:] (6.11)

and in canonical form, using Xt = PYt as usual, Xt = AXt-l becomes

Yt = JYt-l (6.12)

whose solution is, (using De Moire's Theorem)

Yt = Jt Yo = rt [ _ ~~~ :: ;~~::] [ ~~ ] (6.13)

where () = tan- 1 (f3/Ct) , c = p-1xo = Yo.

Example 6.5. Solve Xt = AXt-l where A = [_! !], Xo = ( ! ); C(A) = 0 gives

A = 1 ± i and the corresponding eigenvectors VI =(~) == ( ~ ) +i( ~ ) and

V2 == ih = ( _! ) = ( ~ ) - i ( ~ ). Using P = [~ ~]; (see Ch. 4, eq. 4.37) as

the "modal" matrix, we have by (6.11), (6.12) and (6.13)

t t -1
Xt=Axo=PAP Xo=
[1010] [ (1 +0 i)t 0 ] [24 ]
(l-i)t

~ [-':n((J)t :m: 1[! 1

= [ 2 cos (i) t + 4 sin ( i) t 1 (6.14)
-2sin (i) t + 4 cos (i) t

where () = tan- 1 (1) = 45° = (7r/4) and r = 1 in eq. (6.13) which is exactly the same
as in the scalar case in Chapter 3.

The above discussion can be summarized into a theorem, using the system in
the plane for simplicity.

Theorem 6.4. The system Xt = AXt_l can be transformed into its canonical form

Yt = JYt-l (6.15)

whose solution is
(6.16)
 121

where (i) J = [~l ~2] for the case of real distinct eigenvalues
(ii) J = [~ !] for the case of multiple eigenvalues
(iii) J = r [_::: ; : : ] for the complex roots case and Jt = (~ ~~) for
(,0); Jt = [.\'
0
t.\'-l] l
.\'
(00) d Jt =r t [ -sinOt
Jor n an
cosOt SinOt] l
cosOt
(000)
Jor m 0

In practice, given Xt = AXt-l, the solution takes the form

(i) Xt = Ei=l CiViA~ for the case of real distinct roots
(ii) Xt = E?=l CiViA~+(C()+Clt+C2t2+. ~ '+Cm_ltm-l)A~ for the case some eigenvalue
value Ap is repeated m times, and
000) Xt = r t [XlocoSOt+X20
(III SinOt ] £
X20 cos Ot _ XIO sin Ot or each ' 0f
pair lex'elgenval ues Aj =
comp aj
±0/3
Zj
(B = tan-l (/3j/aj) as in Example 6.5)0

6.3. Reduction to First Order Systems

An nth order doe. of the form

(6.17)

given n initial conditions, can be reduced to a first order d.e. system by redefining
variables as follows

Yl(t) == Xt-n == Y2(t -1)

Yn-l(t) == Yn(t - 1)
Yn(t) = Xt
and write (6017) as

010
o 0
1 0 (6.18)
o 0 1

of the form
Yt = AYt-l
whose solution, as in (6.3) and (6.4), is

Yt = At Yo = PNp-1yo.
The matrix A in (608) is called the companion matrix of (6.17).
122

Example 6.6. The Multiplier-Accelerator Model. Consider Samuelson's

Multiplier-Accelerator model of Business Cycle, analyzed in Example 3.6.1 in Chap-
ter 3. The model is summarized in one second order d.e.

Yt = c{1 + V)Yi-1 - cvYi-2 + G

where Yi : national income, G = Government Expenditure, c = marginal propensity

to consume ({I/{I-c) is the multiplier) and v = accelerator. This could be reduced
to a system of 2 first order d.e. as in (6.18), as

[ X1{t) ] _
X1{t) -
[0-cv c{1 + v)
1] [ -1) ]+ [ 0]
X1{t
X2{t - 1) G

This is of the form Xt = AXt-1 + b whose solution by (6.7), (6.8), is

Xt = At{xo - xe) + Xe
= PAtp-1{xO - xe) + Xe

where c{>.) = IA - >.II = >.2 - c{1 + v)>. + vc = 0 giving>. = ~[c{1 + v) ±

Jc2{1 + V)2 - 4vc] exactly as equation (3.43).
The solution is

where c = P-1{XO -xe), >'1, >'2 = eigenvalue of the companion matrix A and V1, V2 =
corresponding eigenvectors.
In canonical form, where Yt = JYt-b the solution is Yt = Jtyo, in Section 6.2
where J is the Jordan matrix form.
If c = 0.8, v = 1, >. = 0.8 ± O.4i = 0: ± i(3, r = {a2 + (32)1/2 = 0.89. This economy
exhibits convergent (damped) oscillations since r = 0.89 < 1 and c(1 + v)2 < 4v.
The solution, in canonical form, is

Yt
= (0.89)t [ C?S Ot sin Ot ] [ C2C1 ] + Ye
_ smOt cosOt

where Cl, C2 are elements of vector (Yo - Ye) and

It is easy to convert into the original variable Yi and compare the results with (3.44)
in Chapter 3, to verify that they are identical.
 123

6.4. Stability Conditions

6.4.1. Local Stability

From {6.4}, {6.5} and {6.6}, it has been seen that the solution of Xt = AXt-l is
{6.4}, {6.6}
or, in canonical form
{6.9}'
The asymptotic stability conditions can be seen to be simply

I>'il < 1 for all i {6.19}

i.e. all eigenvalues >'1, >'2,' .. ,>'n "lie inside the unit circle, since limHoo Yi{t} =
limHoo >'~YiO = O. This fundamental condition holds for all cases. For the real
roots case, this is obvious whether these roots >'i are distinct or multiple. For the
complex roots case, stability conditions are Irl < 1 in the solution {6.13}

t [ cos iJt sin iJt ] {6.13}

Xt =r _ siniJt cosiJt c.

=
But>. = 0: ± i(3 in the complex case, and 1>'12 >.X = {o: + i(3)(o: - i(3} = 0:2+ (32 =
r2 = 8{= det A) i.e. 1>'1 = Irl = ../0:2 + /3 2 {only + needs be considered, radius r
being positive. See figure 6.1}.

a+ ifj

-""""""""lE---corr---+------a = Re ~

a - ifj

Figure 6.1. >. = 0: ± i(3

Thus 1>'1 < 1 ~~ Irl < 1, i.e. for stability, the modulus of each eigenvalue must lie
inside the unit circle {of radius r = I}.
124

Note that when Ai > 0, the convergence to (O < Ai < 1), or divergence from
(I < Ai), equilibrium is orientation preserving since A: in (6.6) is positive for all t.
However, when Ai < 0, the trajectory is orientation reversing, whether converging
to equilibrium (-I < Ai < 0) or diverging from it (Ai < -1) since A: in (6.6) is
alternatively positive (for even t) and negative (for odd t).
This fundamental condition IAil < 1 'Vi is stated in a variety of ways and numer-
ous theorems examine the conditions for its occurrence. Some of them are
(i) Schur's Theorem: The roots of c{A) = An + CIAn-l + ... +cn = 0 will be less than
unity in absolute value iff the following determinants are all positive
1 0 Cn Cn-l
Cl 1 0 Cn
~2= >0 ...
Cn 0 1 Cl
Cn-l Cn 0 1
1
Cl 1

Cn-l 1 Cn o > O.
~n=
--'c:....:;-----+--:-l-c-l---c~-1
C n n-l
(6.20)

Cn-l o 1

Cl en 0 1
(ii) In practice, a more easily verifiable condition (although stronger than necessary)
is IIAII < 1 where IIAII is any norm of A. In input-output analysis, IIAII is the largest
column sum of A. This can easily be seen by noting that, by definition
Av = Av.
Taking norm on both sides gives

and hence
IAI < IIAII Ilvll = IIAII < 1 (6.21)
- II vII .
This provides what Conlisk (1973) called a "quick check" of stability conditions.
(iii) 161 < 1 and ITI < n.
(6.22)
This can easily be seen by recalling that
6 == det A = det A = II Ai and IAil < 1 ~ 161 < 1
i
n n

T == tr A == L aii = L Ai and IAil < 1 ~ ITI < n.

i i

(iv) For a system on the plane (A is 2 X 2) where the characteristic equation is

c(A) = A2 - T A+ 6 =0, the above stability conditions can be summarized in three
 125

easily checkable rules:

Ic(O)1 < 1, c( -1) > 0 and c(l) > 0 (6.23)

which imply
181 < 1 and Irl < 1 + 8. (6.24)

These conditions can easily be seen by noting that c(>.) = 0 is a convex quadratic
equation (c"(>') = 2 > 0) and if >'1 and >'2 are its two real roots, then c(>'d = 0 =
C(>'2) by definition. These are the points at which c(>.) = 0 intersects the >.-axis (see
figure 6.2)

C(A)

C(A) = 0
'\r----;-:-:1 c( -1)
c( 1)1------1..
----~~~~---T~----A
-1

Figure 6.2. c(>.) = >.2 -.r>. + 8 = 0

and for stability these points must be in the interval (-1,1) i.e. -1 < >'1, >'2 < 1.
Clearly c(>'j) > 0 for all I>'jl ~ 1 and in particular for >'j = (-1,1). Thus if
the system is stable i.e. if I>'d < 1 > 1>'21, then c(-l) > 0 and c(l) > O. But
c(l) = 1 - r + 8 > 0 and c(-I) = 1 + 8 > 0 jointly imply Irl < 1 + 8. Finally
c(O) = 8 = >'1>'2 and 1c(0)1 = 181 < 1. (QED)

6.4.2. Global Stability

For global stability, we have the following theorem

Theorem 6.5. The system Xt = AXt-l is globally stable iff there is a symmetric
positive definite matrix B such that -C = A'BA - B is negative definite.

Proof. Let us take a Lyapunov function V(Xt) of the form

where B is positive definite. It is easy to check that V(xd qualifies for a Lyapunov
function (V ~ 0, ~V < 0).
126

~V(Xt) == V(Xt+l) - V(Xt)

= X~_l BXt+l - x~Bxt.

Substitution from Xt+l = AXt gives

~V(Xt) = x~A'BAxt - x~Bxt

= x~(A' BA - B)xt
= x~( -C)Xt < O. (6.25)

The converse is also true. (QED)

6.5. Qualitative Solutions: Phase Diagrams

For a d.e. system Xt = AXt-l on the plane, phase diagrams are constructed in
the same way as for the ODE systems in Chapter 5, the only difference being that
points are discrete and connected as continuous curves only as a visual aid. We
shall analyze the system in its Jordan canonical form rather than its original form
for simplicity: the two being topologically equivalent.
The characteristic equation c(A) = IA - AIl = A2 - TA + 8 = 0 has the roots
A = T /2 ± ..(is./2 where ~ == T2 - 48. Three cases will be analyzed separately
according to the sign of ~.
(i) ~ > 0 : two real distinct roots Al, A2. The system is a stable node (SN) if
IAil < 1 , unstable node (UN) if IAil > 1 and a saddle point (SP) if lAd < 1 < IAjl
for i,j = 1,2 and i i' j.

"-
Y2 Y2 Y2

~/ ~/ ,/
/ ~ '\ I
Yl Yl

/ ~
Yl

(a) Stable node (b) Unstable node (c) Saddle Point

I~il <1 I~il >1 (I~il < 1 < I~jl (i ~ j))

Figure 6.3. Nodes and Saddle Points

(ii) ~ = 0: Equal roots Al = A2 = A, j = [~ !]

 127

Jf2 Jf2

\ ) \ )
(
1/1 1/1

( '- ~
(a) Stable improper node (II) Unstable improper node

Figure 6.4. Improper Nodes

(iii) f1 < 0: l = Q ± iP where Q E T/2, PE ';-11/2

J= [_p !] =r [_~~: ;~~:]

Irl> 1 Irl < 1

---H-H--+----yl

(a) Unstable focus (UF) (b) Stable focus (SF)

Figure 6.5. Foci

If Q = 0 :F {J, r = ';0: 2 + {J2 = {J < 1 for a stable focus and r = (J => 1 for an
unstable focus.
The various cases analyzed above can be summarized in the 1'·6 parameter space
in the same way as in the ODE system in Chapter 5. Consider the characteristic
equation c(~) = ~2 - 1'~ + 6 = 0 with the solution ~ = 1'/2 ± V"K/2. Referring
to the analysis in 6.4.1 (iv) above, we see that the three stability conditions are
Ic(O)1 = 161 < 1, c(l) > 0 and c(-I) > O. The limiting cases of f1 = 0 (~ 1'2 = 46)
128

and c(l) = 0 = c(-l) delineate stable zones from unstable ones (see figure 6.6).
6 = 0 is represented by the parabola 7 2 = 48 and c(l) = 0 and c( -1) = 0 by the
two straight lines: c( 1) = 1 - 7 + 8 = 0 (8 = 7 - 1) and c( -1) = 1 + 7 + 8 = 0
(8 = - 7 -1).

--------------~--~~--r_~~~--~------------T

Figure 6.6. The stability triangle ABC

Stability conditions require 7 and 8 to lie inside the triangle ABC where -1 <
8 < 1 on the vertical axis and above the c( 1) = 0 and c( -1) = 0 lines in figure 6.6.

6.6. Some Economic Applications

1. A Multisectoral Multiplier-Accelerator Model.

The Samuelson-Hick's Trade Cycle model could be formulated as a multisectoral

model of first order d.e. system. In this economy, consumption (Ct ) is a linear func-
tion of previous income, AXt-l where [aii] == A is the matrix of marginal propensity
to consume (0 ~ aii < 1) and induced investment (It) is a linear increasing function
of rising output, B(Xt-l -Xt-2) where B == [b ii ] > O. More precisely, national income
vector Xt is
Xt = AXt-l + B(Xt-l - Xt-2).
This could be transformed into a system of first order d.e. as in (6.18)

[ Yl (t)]
Y2(t) =
[0-B I] [ Yl (t -
A+B Y2(t - 1)
1) ] .
 129

This is of the form Yt = CYt-1 whose solution is, by Theorem 1:

Yt = Ctyo = PAtp-1yo.

2. Capital Stock Adjustment Model.

Duesenberry (1959) examined an economy in which investment (It) is an increas-

ing function of previous period's income, alYi-ll and a decreasing function of past
capital stock, -ll2Kt - ll whereas consumption (Ct ) is a linear increasing function of
past income, and wealth (capital), i.e.
It = al Yi-l - a2 Kt-1
Ct = b1Yi-1 + ~Kt-l
K t = It + (1 - c5)Kt- 1
where c5 = constant depreciation rate and ai, bi > 0 (i = 1,2). This is a first order
d.e. system

of the form Xt = AXt-1 whose solution, by Theorem 1, is

Xt = Atxo = PAtp-1xo.
Further analysis consists in examining stability conditions in relation to the struc-
tural constants ai, bi and c5(i = 1,2). Smithies (1957) model is also in the same
velD.

3. Distributed Lags Model.

Consider the Keynesian model of income (Yi) determination in which the imme-
diate as well as distant past continue to influence current economic activities. More
specifically let induced investment (It) have a two-period lag and consumption (Ct )
have a three-period lag, i.e.
It = VI(Yi-1 - Yi-2) + V2(Yi-2 - Yi-3) , (VI + V2 = V)
Ct = clYi-1 + c2Yi-2 + c3Yi-3, (CI + C2 + C3 = c)
Yi = It + Ct = (VI + CI)Yi-1 + (C2 + V2 - VI)Yi-2 + (C3 - V2)Yi-3
== alYi-1 + a2Yi-2 + a3Yi-3
or, as a first order d.e. system,

YI (t)
[ Y2(t)
1[ 00
Y3(t) a3
130

or
Yt = AYt-1
where A is the companion matrix of the above system. The solution, by Theorem
1, is
Yt = AtYo = PNP- 1yo
where A1, A2, A3 are the solution to C(A) = _A 3 + a1A2 + a2A + a3 = O.

4. Dynamic Input-Output Model.

The Dynamic Input-Output Model of Leontief has been analyzed extensively

especially in the late 1950 and early 1960's (see, for example, Solow (1958), Mor-
ishima (1958) Jorgenson (1961)). The continuous model has been examined in
Chapter 5. The discrete model is now presented, as an illustration of an economic
application of d.e. systems.
Consider a closed dynamic Input-Output model

where as usual (see Chapter 5), A == [aij] = input-output coefficient matrix,

(0 :s
aij < 1) and B == [b ij ] = non negative capital requirement coefficient ma-
trix. Rewriting this, putting 1 + B-l(I - A) == M, we have

Xt+l = [1 + B- 1(I - A)]xt

== MXt
whose solution Xt = Mtxo = PN P-1xo = CIVIAt + C2V2A~ + ... + CnVnA~ where
A == diag (Ai), (i = 1,2, ... ,n), Ai are assumed distinct with their corresponding
eigenvectors Vi, independent of one another, and Ci are arbitrary constants to be
determined by initial conditions, i.e. Ci are the elements of C = p-l Xo.
In general, the Ai are complex numbers and Vi may contain some negative ele-
ments, so that some output viAl may become negative and hence have no economic
meaning. The question then arises as to what conditions would guarantee the exis-
tence of a positive eigenvalue, say AI, and a positive associated eigenvalue VI.
To answer this question, note first that (1 - A) E Z where Z is the class of square
matrices with non-positive off-diagonal elements (Fiedler and Ptak 1962) and have
positive eigenvalues with (1- Atl > 0 as had been noticed earlier by Hawkins and
Simon (1949). (I - Atl B > 0 being a product of two positive matrices and by
Froebenius Theorem (see Chapter 5) there exists a simple eigenvalue f.l* > 0 and
a unique associated eigenvector v* > 0 such that J1.* > lJ1.il for all other i. The
economy is thus capable of balanced growth.
The associated price system, in row vector, is
 131

which Solow (1958) interprets in the light of Capital theory as the equilibrium
condition of an investor facing the choice between using his money to set up business
and lending it out for interest (r) income. In the first alternative, he would receive
his sale revenue, at the end of the period, Pt+1 less his current costs Pt+1A and
still owns his equipment worth Pt+1B to enter the second period. In the second
alternative, he lends ptB at interest rate rt and will get (1 + rt)ptB. In equilibrium,
he would be indifferent between the two, and we have the dynamic system

Pre-multiplying by B-1 and setting rt = 0 for simplicity, we have

Pt+1[(I - A)B- 1 + Ij = Pt

or
r
PH1 = pt[I + (I - A)B- 1 1 '= PtN
where N '= [I + (I - A)B- 1j-1. The output system Xt (in column vector) and its
price dual Pt (in row vector, to avoid transposition notations), are

Pt+1 = PtN.
Jorgenson's dual instability can then be shown very simply by noting that M
and N- 1 have the same eigenvalues, say A, and hence M and N have eigenvalues
which are the inverse of each other, i.e. A and t, where A = 1 + J.L and J.L is an
eigenvalue of B- 1(I - A) or of (I - A)B-1 as has been noted in section 5.9.2 of
Chapter 5 (see also Chapter 4). This establishes the Saddle Point property of the
system's solution i.e. x(t) = Mtxo = C1V1A1 + ... + CnVnA~ and p(t) = (N')lpo =
t
C1W1Alt+ ... +CnWnA;;-t: in other words, if A is inside the unit circle, then is outside
it. Using the nonnegativity of the matrices M and N- 1 and the Perron-Frobenius'
theorem concerning the existence of a largest nonnegative eigenvalue, say A1 such
that A1 > IAi 1 (i = 2,3, ... , n) and a corresponding nonnegative eigenvector say v 1.
Jorgenson has also established the dual relative instability, defined as

.I
hm - Xi - -
t--+oo Xl V1
I
Vi <€ (€>O)
where Xi(t) is the ith component of the solution x(t) = eMtxo and Vi the ith compo-
nent of the characteristic solution vector v. Thus if the output system x(t) is stable,
its dual price system p(t) is unstable and vice versa.
Chapter 7
Nonlinear Systems

7.1. Introduction

In Chapter 5, we have dealt with linear dynamic systems, the nature of their
equilibrium, and their analytical as well as qualitative solutions. In this chapter,
we are discussing nonlinear systems. These are more important since the world is
more nonlinear than linear in general, and also linear systems can be considered
a local linearization of nonlinear systems about an equilibrium point. Nonlinear
systems can be approximated by such linearization in some cases and not in some
others. This will be discussed in the Linearization theory in the general context
of solution spaces, together with their stability and qualitative solutions. A brief
introduction to Limit Cycles will be presented. The discussion will be illustrated
with some applications in Economics and Biology.
Note that Dynamical Systems refer to both the continuous system represented
by differential equations
(7.1)
whose solution gives rise to a flow, and the discrete systems represented by difference
equations
Xt+! = g(Xt) (7.2)
written as a C r (i.e. a smooth r-times (r ~ 1) differentiable) map

x f-t g(x). (7.2)'

It is known that if f(x) is C r (r ~ 1) then the solution through x E Rn exists, is

unique and is also a C r function. Similarly, a Cr-map g(x) is invertible if it has an
inverse g-l(X) which is also C r i.e. the map is one-to-one and onto, hence the name
diffeomorphism for this map.
As usual, our discussion will concentrate mostly on flows, except when the im-
portance of maps warrants a separate treatment. In fact, continuous flows can give
rise to discrete maps and have much to gain by being looked at from the perspective
of maps (for example Poincare's map).
Consider the non-linear differential equation system

~~ == x = f(x), x(O) = Xo (7.1)

where x(t) ERn is a vector valued function of time (t) and f : U -t Rn is a smooth
function defined on some subset U of Rn. Then f is a vector field which generates
134

a flow <Pt : U -+ Rn where <Pt(x) =<p(x, t), defined for all x E U and t E (a, b)
satisfying
d
dt <p(x, t)t=6 = f[<p(x, s)]
for all x E U and s E (a,b).
Given some initial condition Xo E U, the solution of (7.1) consists in finding a
flow <p(xo, t) satisfying <p(xo,O) = Xo. Does such a solution exist and is it unique?
Assuming the Lipschitz constant K exists where

If(y) - f(x)l ~ K(x - y) (7.3)

we can be assured of both the existence and uniqueness.

Theorem 7.1. Let x = f(x) : U -+ Rn in {7.1} be differentiable, with Xo E U

and the Lipschitz condition {7.3} be satisfied, then the solution to {7.1} exists and is
unique.

Proof. Coddington and Levinson [1955], or Hirsch and Smale [1974] or any standard
text book on differential equations. The proof of existence and uniqueness can also
be carried out by use of the Contraction Mapping Theorem discussed in any text
book on Functional Analysis, such as Taylor [1958] or Kolmogorov and Fomin [1957],
for example. It will not be carried out here.

7.2. Linearization Theory

Definition 7.1. Given the system of n nonlinear ordinary differential equations

(7.1)

a point x* at which f(x*) = 0 is called a critical point or fixed point or equilibrium

point. Any point x in the phase plane of (7.1) which is not a fixed point, i.e. f(x) -1O,
is called an ordinary or regular point.

Definition 7.2. A fixed point is said to be simple if its linearized system Ax has
no zero eigenvalues, i.e. if det A -I 0.

Definition 7.3. A simple fixed point is called hyperbolic if A in its linearization

Ax has no eigenvalues with zero real parts.

Consider the nonlinear system x = f(x) in (7.1). Using Taylor expansion about
some critical point x*, set at the origin for simplicity, we have

x = Ax + cp(x) (NL) (7.4)

 135

where

and cp(x) is such that lim.,-to cp(x) = 0. Ax in (7.4) is called the linearization of
(7.4) or the linearized system i.e.

x= Ax. (L) (7.5)

For systems in the plane, U C R2 (n = 2) we have

x = f(x) = Ax + cp(x) as
Xl = II (x) = aXI + bX2 + CPI (Xl, X2)
X2 = h(x) = cXI + dX2 + CP2(XI,X2)

°
where a == afI/axl == au; b == alI/aX2 == a12; C == ah/aXI == a21, d == ah/aX2 ==
a22 and liIIlr-to 'f,(":,"2) = = liIIlr-to 'f2(":,"2) where r == Jx~ + x~, i.e. CPI and CP2
being so small, can be neglected, provided the critical point is hyperbolic.

Example 7.1.

X = X + 2y+x 2
if = 2x + y + xy2.
Clearly the critical point is the origin i.e. (x*, y*) = (0,0), where

A = [ ac db] = [12]
2 1 ; CPI = X2 , CP2 = xy2

°
with lim."lI-to CPI = = lim."lI-to CP2. The origin is a simple critical point since the
eigenvalues ,X = (3, -1) are both nonzero, det A = -3 ¥- 0. It is also hyperbolic
since Re (,X) = (3,-1) ¥- (0,0).
In general, for any critical point (x, y) ¥- (0,0), we can define their variations as
new variables ~ == (x - x), Tf == (y - y) and X = f(x) is

( ~Y ) == ( ~)
Tf
= [ac db] [ xy -- ~Y ] + [ CP2(~'
CPI(~' Tf) ]
Tf)
.

This only represents a shift of the critical point from (0,0) to some nonzero (x, y).

Theorem 7.2. (Linearization Theorem of Hartman & Grobman). Let the

nonlinear dynamic system X = f(x) in {7.1} have a simple hyperbolic fixed point x
set at the origin for simplicity. Then in the neighborhood U of x E RR of this equilib-
rium, the phase portraits of the NL system {7.1} and its linearization L (i. e. X = Ax)
in {7.5} are equivalent.
136

Proof. Hartman (1964). Although the proof is involved and not presented here,
the Theorem is easy to understand and apply. It simply says that provided no
eigenvalues of A lie on the imaginary axis (including the origin) in the complex plane
(fig. 7.1), in other words, provided Re (Ai) '" 0 Vi, then L and NL are qualitatively
equivalent: nodes, saddle points (SP) or spirals in L remain nodes, SP or spirals in
NL. Thus, it can be seen that near a hyperbolic critical point, the dynamical system
is structurally stable: it is robust to small perturbations. Hyperbolic critical points
are also called generic in that their occurrence is the rule rather than exceptions.
Thus, provided the critical point is generic, it is sufficient to study the lineariza-
tion Ax, as if it was a linear system x = Ax. But this has been discussed at length
in Ch. 5 where the solution of x = Ax, for a given x(O) = Xo, has been shown (in
equation 5.14), to be
(7.6)

where x ERn, y == p-lx and J is the Jordan form of A. For the case of distinct
eigenvalues Ai of A, J = diag (At, A2, ... ,An) == A and (7.6) is simply

or
(7.7)

7.2.1. Linearization of Dynamic Systems in the Plane

For nonlinear systems of 2 dimensions, x E R2, n = 2, we have the linearization

of x = f(x) : R2 ~ R2 as x = Ax whose solution is (7.7) where A is the eigenvalues
of A obtained by solving C(A) = det(A - >./) = 0, is

(7.8)

where 7 == tr A = all + a12, 8 == det A = alla22 - a12a21 and ~ == 7 2 - 48. Several

cases are possible depending on sgn ~ (see Ch. 5): A in (7.8) are real and distinct if
~ > 0, real and multiple (identical) if ~ = 0 and complex if ~ < o. In the first case,
Re A = A in (7.8): the critical point is either a Node (N) or a Saddle point (SP); in
the second case, ~ = 0, and Re A = A = 7/2: the critical point is an Inflected Node
(IN) provided 7 '" 0 and in the third case, ~ < 0, A = a ± i(3 where a = 7/2 and
2(3 = ";48 - 72 : the critical point is a focus (F), attracting if 7 < 0 ± (3, repelling if
7 > 0 '" (3 and a centre if 7 = 0 '" (3 and a completely degenerate if 7 = 0 = 8 i.e. if
a = 0 = (3.
Locating the position of eigenvalues in the complex plane as, for example,
 137

ffiR +
hnA I

• represented or
simply
ReA as windows as

Figure 7.1. Position of eigenvalues in the complex plane

we can spell out the above analysis, separating the hyperbolic from nonhyperbolic
cases as follows. (See Table 7.1).

Table 7.1. Eigenstructure of planar systems

Eigenvalues Al , A2 Position of At, A2 Nature

Hyperbolic critical point (Re A f; 0)

Case (1): .6. >0 (i) Real, unequal A of same sign

+ + or SN or UN

(ii) Real unequal A of opposite signs

-+ SP

Case (2): .6. = 0 Al = A2 = A = T/2 ~ 0

+ + or IN

Case (3): .6. < 0 A = a ± i{3, a f; 0 f; {3 .;f- or -f.- SF or UF

Nonhyperbolic critical point (Re A = 0)

Case (4): .6. > 0 (i) Ai = 0 f; Aj (i f; j)

i.e. A = (0, T) where
~
T
8= 0
~ 0 + + or SD

(ii) Al = 0 = A2 ~ 8= 0= T
+ DG

Case(5): .6. = 0 Al = A2 = T /2 = 0 ~ T = 0 + DG

Case(6): .6. < 0 A = ±i{3, T = 0 < 8

(i.e. A = a ± i{3 where a = 0 < (3) + C

Abbreviations: SN = stable node; UN = unstable node; SP = Saddle Point;

IN = Improper, or Inflected Node; SF = Stable Focus; UF = Unstable Focus;
SD = Single Degenerate; DG = Double Degenerate; C = Centre.
138

The above eigenstructure of Dynamical Systems in the plane can also be shown
in the parameter space as in fig 7.2.

*"
*
Stable Unstable

~
Nodes

~
Nodes
,.. _tr A

j~(
P',
+./ ~ -f.
}~"
X(
\ (
,';"4,-, ,~'\
IADDLE S.P.

Figure 7.2. Eigenvalues structure in the parameter space

1m .\

--------*--------Re.\ -----E~~~------Re.\

Figure 7.3. Figure 7.4. A come together,

A leave the imaginary axis collide then split

Thus, the Linearization Theorem says that so long as the critical point is hy-
perbolic i.e. Re (Ai) =f:. 0 'Vi, Land NL are qualitatively equivalent and hence it is
sufficient to solve the linearized problem. However, when Re Ai = 0 the system is
structurally unstable and linearisation is inappropriate. Take case (6) for example,
eigenvalues lie on the imaginary axis: the critical point is a centre. A slight per-
turbation would cause them to leave the axis to move to the right thus becoming a
 139

repelling spiral or to the left thus becoming an attracting spiral. The system loses
its structural stability. If eigenvalues are functions of some parameter, a change in
the latter may cause them to move on the imaginary axis to come together until they
collide at the origin then split on the real axis: a centre thus becomes a stationary
point then split into a SP equilibrium. See fig. 7.3 and 7.4.

Example 7.2.

Xl = -X2 + fr2xl
X2 = Xl + fr2x2
where r2 == x~ + x~ and f = 1 in system I and f = -1 in System II. Both systems
have the linearized part X = Ax where A = (~ -~) with eigenvalues A = ±i and
the critical point is a centre. In polar coordinates, Xl == r cos 0, X2 = r sin 0, we have
x~ + x~ = r2 (cos 2 0 + sin2 0) = r2 and tan 0 = X2/ Xl, which give, on differentiating
and substituting, as in Ch. 5 (see eqs. 5.41, 5.42),

r
20· = •
XlX2 -
.
X2Xl

iJ = 1 for both systems

rr = XlXl + X2X2 + X2 X 2 = r3
r = r2 > 0 for system I (f = 1)
r = _r2 < 0 for system II (f = -1).

It can be seen that although both systems have the same linearized part, which
is a centre, both moving anticlockwise, but radius r expands (r > 0) in system I,
causing an unstable (repelling) spiral and r shrinks (r < 0) in system II, causing
an attracting or stable spiral. Thus the Land NL systems are not qualitatively
equivalent and Linearization is not allowed. See fig. 7.5.

0 (a) Linearised
a (b) NL in I
®
(c) NL in II
Systems I and II

Figure 7.5. Non hyperbolic critical points

140

Example 7.3. Collison of eigenvalues of ± = Ax where A = [~ ~], A = ±Jf.

This is an example of A(f) depending on parameter f.
For f < 0, A = ±iJf which is a centre.
For f = 0, A = (0,0).
For f > 0, A = ±Jf, a S.P.
Thus, as f increases from negative where both eigenvalues lie on the imaginary
axis, to zero, Al and A2(= Xl) collide at the origin. If f increases further, to some
positive value, however small, A split and move in opposite directions on the real
axis, and becomes a S.P. (See fig. 7.6.)

------~~~------Re~

Figure 7.6. Collision and split of eigenvalues

Example 7.4. Lotka-Volterra's Prey-Predator Model. The observation of

the fluctuations of prey and predator fish population in the Upper Adriatic in the
postwar I period has led Lotka (1925) and Volterra (1931, 1937) to formulate a
model to explain this interaction. This provides an excellent illustration of nonlinear
dynamic system in the plane.
The prey population x(t) was observed to increase at rate a (i.e. ± = ax) which
is decreased by -cxy due to the presence of predators y(t) and their encounters with
preys. Similarly, in the absence of preys, predator population y(t) decreases at rate
b (i.e. if = -by, b > 0), but with the appearance of preys, this decline is showed
down by dxy (d> 0). Thus the model is i = J(z) or

± = ax - cxy
if = -by+ dxy (7.9)

where a,b,c,d are positive constants. The Jacobian DJ(x) == A evaluated at equi-
librium z (== x, y), is

DJ(z) == A(z) = [ a -dyCY -b+dx

ex ] .
 141

Clearly there are 2 critical points z = (0,0) called extinction equilibrium, and
Z = (b/d,a/c) called coexistence equilibrium and A at these points are

A(z) = [ 0 -cb/d]
ad/c 0

with eigenvalues '\(A(z)) = (a, -b) and '\(A(z)) = ±iVab. The first critical point
is thus a S.P. at the origin and the second critical point is a centre with neutral
stability (see fig. 7.7).

' \ (bid
----------__~~-----L-------x

Figure 7.7. Lotka-Volterra's Model

:d
Note that at Z, we have x = -~ y and iJ = x which could be written as y+ab y =0
or y + w2 y = 0 where w2 == ab, whose solution is

y(t) = a cos(wt - 8)

where a is the amplitude of the oscillation with period 27r/w, as shown in fig. 7.7.

Example 7.5. As another illustration of nonlinear dynamic system in the plane,

let us consider a moose (M) wolves(W) model (Tu 1988):

if = (Ct - atM - btW)M

tV = (C2 + a2M - b2W)W

where ai, bi , ci > 0 (i = 1,2) with cdb2 < ct/b t .
It is here assumed that in isolation, both species obey the law of logistic growth
CtM - atM2 and C2W - b2W2. The encounters between the two species cause the
moose population to decrease by bt MW and wolf populations to increase bya2MW,
as above. The model incorporates the Lotka-Volterra's model as a special case in
which at = 0 = b2 • Linearization about critical point x == (M, W) gives x = A(x),
or in full
142

where m == M - Jf, w == W - liT and Jf, liT are such that Ai = 0 = l,tl. AE a
numerical example, let (al,bl.el) = (1,-1,4) and (a2,~,c2) = (1/2,1/2,1). It is
easy to see that there exist 4 equilibrium point.s
Xl = (0,0) with Al = (~ ~), >. = (4,1)
X2 = (4,0) with A2 = (~ -:) , >. = (-4,3)
Xl = (0,2) with Al = (~ _~) , >. = (2,-1)

X4 = (1,3) with ~ = [~~ -~~2]' >. = -1.25 ± i(1.2).

Thus at Xl. at the origin, both species increase, at X2, moose population decreases
and wolf, increases at xa, the opposite and X4 = (1,3) is the coexistence equilibrium,
reached by an attracting spiral. See fig. 7.B.

w
4
3
2

---,~----~L------------------4~~~~--------M
4

Figure 7.B. Moose-Wolf populations

Example 7.6. Goodwin's Income Distribution Model. Goodwin's (HIG7)

model of income distribution based on class struggle was inspired by Lotka-Volterra's
model. It is

x= (a - by)x
y = (ex - d)y

'where x = employment rate = workers/labour force == L/N; y = worker's share in

national income wL/Q where Q = GNP; and L = number of workers = Loe nt ;
1 - y = capitalists' share, 0 ~ x, y ~ 1; a == b - (m + n) = capital productivity (b)
net of Harrod-neutral technical progress (m) and population growth (n); d == e + m
where w/w ~ -e + ex (see fig. 7.9); w == wage and -e is the vertical intercept.
\Vith this, we have exactly the Lotka-Volterra's model, with 2 critical points
Zl = (0,0) which is a saddle point, A(O,O) = (~ _~) ,>. = (a, -d) and Z2 =
(d/c,a/b), A(Z2) = (:/b -~/c) ,>. = ±iv'ad which is a centre. See fig. 7.lD.
 143

liI.
w

------~~----~~--~~-------X
o

-e

Figure 7.9. The wage rise function *

II

tlmax ••••••••••••
..
• ••••• :

alb

____ ~---L--~~--~-----------X
Xmin die Xmax

Figure 7.lD. Goodwin's Class Struggle model

The coexistence equilibrium Z2 being a centre (Re .\ = 0) the Linearization)

does not provide any reliable information on the behaviour of the dynamic system
in its neighbourhood. Thus the model describes the class struggle which results
in a perpetual fluctuation in employment rate (x) and workers' income share (y)
bet\veen an Xmax and an Xmin, between an Ymax and Ymin, averaging, at Xav and Yav
(== (Ymax+Ymin)/2) in the long run. Similarly the ratio T == y/x = (wL/Q)/(L/N) ==
w / q where q = income per head of population, indicates the relative posi tion of the
workers' income compared with per capita income. The model generates a perpetual
fluctuation of T between Tmax and Tmin, averaging at Tav in the long run.
Goodwin's model has been extensively studied and developed further by Velupil-
lai (1979), Wolfs tetter (1982), van der Ploeg (1983) and Flaschel (1984) among
others.
144

7.2.2. Linearization Theory in Three Dimensions

The Linearization Theory holds for dynamical systems of any dimension n. How-
ever, for n > 2, phase diagrams are getting complicated. For n = 3, all 3 eigenvalues
can be either all real (including zero and multiple) or one real and one complex pair,
and the canonical form oftke linearized part Ax == D/(x}x (x E R 3, A E R3 X R3)
is

or
[~ o
Q
-f3
f30
Q
1 or

where A = Q ± if3 with Q = 0 for pure imaginary A, f3 = 0 for real A and Q "I 0 "I f3
for complex A. This exhausts all possibilities. Their phase diagram is presented
in fig. 7.11 where on1y hyperbolic critical points are presented. These are cases
where linearization is useful. Other non hyperbolic critical points such as the cases
where one or more eigenvalues have zero real parts, for example where Al = 0,
A2, A3(= A2) = Q ± i,B or Al = 0, A2, A3 = ±if3, all on the imaginary axis, are not
considered: linearization would give misleading results.

Attractors
(stable) ~4. ~+
~* ~+
Saddle
Point

Saddle
Point ~~ ~+
Repellors
(unstable) ~+ ~+
Figure 7.11. Hyperbolic flows in 3 dimensions
 145

7.2.3. Linearization Theory in Higher Dimensions

In higher dimension systems, it is no longer easy to draw phase diagrams, but

the Linearization Theorem remains.
Given x = f(x), the linearized system x = Ax for a given x(O) = Xo has the
solution x(t, xo) = eAtxo which specifies a point at which the solution based at Xo
lies for all time t. Thus eAt defines a flow 4>t on Rn generated by the vector field Ax
on Rn. The set of all solutions to x = Ax lies in the linear subspaces spanned by
eigenvectors: .
(i) the stable subspace E· == span {v 1 , v 2 , • •• ,vn.}
(ii) the unstable subspace EU == span {u 1, u2, .. . , un.}
(iii) the centre subspace EC == span {w 1 , w2 , •.• ,WC}
where E·, EU, EC are respectively subspaces spanned by the n. stable eigenvectors
associated with n. eigenvalues with negative real parts; nu unstable eigenvectors as-
sociated with nu eigenvalues with positive real parts; and nc eigenvectors associated
with nc eigenvalues having zero real part. Clearly n B + nu + nc = n. Solutions lying
ES exhibit exponential decay, those lying in EU, exponential growth and those lying
in EC have neutral stability.

Example 7.7.
o 0 -1
1
x = Ax where A = Df(x) = [~ ~ -~ i.e. Ax is the linearization

0) , U) 0)
of x= f(x). c(>.) = det(A - >.J) = 0 gives >. = (0,1, -1) with corresponding

cigenvectors VI = v' = and v' =

EB = span (2,0,1),
E U = span (2,1,0),
E C = span (1,0,0)
ns + nu + nc = 1 + 1 + 1 = 3 = n.
Of course, linearization is valid only for hyperbolic flows where nc = 0 and
n. + nu =n. With this, we have

Theorem 7.3. Let x = Ax define a hyperbolic flow on Rn with dimension EB = n B,

dimension EU = nu (n. + nu = n for hyperbolic flows). Then x = Ax is topologically
equivalent to the multidimensional S.P.

x. = -xs, x. ERn.
(7.10)
Xu = xu, Xu ERn•.

Proof. This follows from the definition 7.3 of hyperbolicity: n. + nu = n and of

the topological equivalence of two flows f (x) and g( x) as having dim Ej = dim E;,
i.e. D f(x) and Dg(x) as having the same number of eigenvalues with negative real
parts.
146

Theorem 7.4. (Hartman-Grohman). Let x* be a hyperbolic fixed point of x =

f (x) with flow CPt : U c Rn -t Rn. Then there is a neighbourhood N of x* on which cP
is topologically equivalent to the linear flow eAtxo where A = Df(x*), i.e. N.L.(7...0
is topologically equivalent to L{7.5).

Proof. Hartman (1964).

Example 7.S. For an illustration of a 3-dimensional Dynamical System, let us

consider a model of disequilibrium adjustment in a classical Macroeconomic model
[Tn (1987), Smithin and Tn (1987)] where price (p) rises when demand Y{P) exceeds
supply X{w/p) in the goods market, wage (w) rises in response to the excess of
labour demand N{w/p) over fixed labour supply (N) and interest rate (r) rises in
response to the excess of loan demand (I(r» over supply S(X, r) i.e.

p = kl[Y(P) - X(w/p)]
tV = k2[N(w/p) - N]
r = k3[I(r) - S(X, r)]
where ki (i = 1,2,3) = constant positive speeds of response, and p = price. The
properties of the model are assumed to be as follows.
A.l Y'(p) < 0, X'(w/p) < 0(' indicates derivative)
A.2 N'(w/p) < 0
A.3 I'{r) < 0 < Sz and Sr > o.
The linearized system is x = Ax where

with the sign[p.:-tt:-n 0 1

sgnA= + - 0
+ 0 -
c(A) == det(A - AI) = 0 gives
A = [~(7 ± ~1/2), k3 (I' - Sr)]
where
7 == tr A33 = all + a22 < 0
8 == det A33 = k 1 k2N'Y' /p > 0
A33 == cofactor of a33
~ == 7 2 - 48 = (all - a22)2 + 4a12a21 > 0 by A.1.
The results are
1. The model is locally stable, since all 3 eigenvalues have negative real parts:
7 < 0, I' - Sr < 0;

2. The model is globally stable. Take the Liapunov function v(x) == x' Bx, B
positive definite v{x) = x' Bx + x' Bx = x'{A + A')x < 0 where A is a stable
matrix by (1), and B = I, the equal weights case.
 147

3. A sufficient condition for 6 > 0, i.e. for the existence of two distinct roots '>'1
and '>'2 ('>'3 = k(I' - Sr) < 0) is that both the aggregate output supply and
labour demand be decreasing functions of real wage (w/p) i.e. N' < 0 and
X' < O. It is easy to see that it is sufficient for 6 > 0 that a12 and a21 be of
the same sign, which implies N' < 0, X' < O.

4. The model has a stable node equilibrium. This can be seen by noting that
'>'3 < 0, ~(r ± ..[is.) < 0, ..[is. == vr2 - 46 < Irl, hence there are no complex
roots and no saddle points.

5. If the aggregate demand is vertical, i.e. Y' = 0, then.>. = [0, r, k3 (I' - Sr)], and
if I' = Sr, .>. = [~(r ±..[is., 0]: in either case there exist two negative and one
zero eigenvalues. The critical point is a stable node as can be seen by reference
to the Centre Manifold Theorem. Thus, so long as the aggregate Demand is not
verticle and/or the I and S have the same slopes, ns + nu + nc = 3 + 0 + 0, and
the flow is hyperbolic and the NL and L systems are topologically equivalent.
This equivalence is lost when Y' = 0 and/or I' = Sr.

7.3. Qualitative Solution: Phase Diagrams

A well known technique for finding a qualitative solution to the system x = f(x)
is the method of isoclines. This is particularly useful when the dimension is low and
f(x) is autonomous. In the plane, for example, we

x= f(x,y) (7.11)
iJ = g(x,y). (7.12)

Along a trajectory, ignoring for now the possibility f = 0,

we seek curves y = hI (x) or x = h2(y) such that the slope of the vector field
dy/ dx = c is a constant, i.e. g(x, y) = cf(x, y), the solution of which, for the various
c, gives the isoclines, i.e. curves on which the trajectories have the same slope c.
The main steps are as follows:
(i) Draw horizontal (H) and Vertical (V) manifolds H == {x, ylg = O}, V == {x, ylf =
O}. Trajectories cross H horizontally and V vertically. The points where H meets
V are the critical points or equilibria, and if (x*, y*) is one such, f(x*, y*) = 0 =
g(x*, y*).

(ii) Then evaluate the Jacobian [I"g" gIlI,,] at (x*, y*) and find its determinant 6,
trace r and discriminant 6 == r2 - 46, i.e . .>. = ~ (r ± vr2 - 46). The linearization
148

theory then says that the critical point is a source (sink) if fJ > 0, r > 0 (r < 0), a
SP if fJ < O. If fJ > 0 and a < 0, we have a spiral.
(iii) We can then draw the trajectories near the critical point, taking special account
of the 8Bymptotes ofthe hyperbolae when (x*,y*) is a S.P. Now dy/dx cannot change
sign on each of the region R of R2 - (H 0 V). Place arrows in on each side of H and
V. For example:i; > 0 * * *
f > 0, y > 0 9 > 0 and:i; < 0 f < 0, y < 0 9 < o. *
Then draw trajectories in the direction of these arrows, subject to the no-crossing
rule: trajectories cannot cross except at critical points.
(iv) If (j, g) is a gradient system (see Ch. 8), then no spirals or limit cycles can exist:
the critical points must be maxima, minima or S.P. This is because the Jacobian
matrix is symmetric and hence can only have real eigenvalues.

Example 7.9. Let the linearization of x = f(x) be AI where A = (-~ _~) i.e.

Xl = -Xl + 2X2 == f(x, y)

(7.13)
V : f = 0 gives X2 = !XI
H : 9 = 0 gives X2 = 2XI.
The isoclines are given by solving
dX2 2XI - X2
-=
dXI -Xl + 2X2 =c
which gives

separatrix (inset)

Figure 7.12. X = Ax, A = (-~ _~)

 149

The lines whose slope is the same as that of the phase space, i.e. X2 = CXl, cannot
be crossed by any phase curve: they either move to the origin (if c < 0) or away from
the origin (if c > 0), and are sometimes called the inset and outset, respectively.
They are the boundaries separating phase curves and are called separatrices. In our
example, their slope c is equal to the slope (2 + c) / (2c + 1), i.e.

2+c
- - = c::} c= ±1
2c+ 1

i.e. the separatrices are X2 = ±Xl (see fig. 7.12)

Note that considerable simplicity can be obtained by rotating the separatrices

to make them coincide with the axes. Thus c(,x) = det(A - AI) = 0 gives ,X =
(-3,1) and the corresponding eigenvectors (Vl' V2) == P = (-~ ~). Using the
transformation x = Py, :i; = Py = APy gives y = p-l APy = (-~ ~) y i.e. Yl =
-3Yl' Y2 = Y2 are now separatrices in the y coordinates (see fig. 7.13).

Y2

--------~~OM--E~-------Yl

\(
Figure 7.13. Y= Ay, A = (-~ ~)

7.4. Limit Cycles

When the system :i; = f(x), x E R2, admits periodic solutions which are rep-
resentable in the phase space as closed curves, we have a limit cycle (LC). These
are closed isolated trajectories exhibiting repetitive patterns of a stationary motion,
in contrast with those critical points which represent equilibrium states. A L.C. is
stable if it attracts, and unstable if it repels, neighbouring curves and semi-stable if
it is an attractor on one side and a repeller on the other (see fig. 7.14).
150

-+-+-++-++-%1 ---L+--+++--+_%I -;--i+'\---t-I- %1

(a) attractor (b) repeller (c) semi-attractor

(stable) (unstable) (semi-stable)

Figure 7.14. Limit cycles in the plane

Example 7.10. Consider the system

x= y + x(1 - x 2 _ y2)
iJ = -x + y(1 - x2 - ~). (7.14)

In polar coordinates, with x == rcos8 and y = rsin8, x 2 + y2 = r2 and tan 8 =

y/x, we have, on differentiating and substituting (as in 5.41 and 5.42 in Ch. 5)
2rr = 2xx + 2yiJ ~ r = r(1 - r2)
r 20 = xiJ - yx =*' iJ = -1.
It is easy to see that this represents a family of curves tending towards the circle
of radius r = lover time: if r > 1, r < 0 i.e. the trajectory spirals toward the circle
of radius r from outside, and if r < 1, r > 0 i.e. the system spirals from the origin
toward the circle of radius r where the cycle perpetuates itself for r = O. This is the
case of a stable L.C., in attractor, in fig. 7.14 (a).
L.C. require advanced treatment. We shall restrict our presentation to L.C. in
the plane since in higher dimensions, the theory is not yet fully developed. We shall
present some main theorems and discuss some economic applications.

Definition 7.4. Given the vector field f(x) of x = f(x), x E R2, a point y is said
to be an w-limit point of x EWE R2 if liml-+oo (Pt(x) = y and an a-limit point if
liml-+_ oo (Pt(x) = y. (See Hirsch & Smale 1974).
The set of all w-limit points of x is called the w-limit set, L",(x). Similarly
La(x). In general, the limit set L(x) is the set of all limit points x E W. If x is
asymptotically stable, L(x) consists of a single point. A closed orbit is the limit
set of every point on it, i.e. if the closed orbit is a limit cycle, then 'Y C La(x) and
'Y C L",(x). Thus the limit set L(x) of'Y is non-empty, closed and connected. If
L(x) contains a regular point P (i.e. a point at which f(x) # 0) then the trajectory
'Y through P is a full trajectory and 'Y lies entirely in L(x). A limit cycle crosses a
transversal f in only one point. (See fig. 7.15).
 151

Figure 7.15.

In practice, it is important to know whether a L.C. exists. The following theorem

is useful to detect it.

Theorem 7.5. Given the system x = P(x,y), i; = Q(x,y) there are no L.C. in a
region where (P", + Qy) is of the same sign.

Proof. Suppose C is a closed orbit of a periodic solution enclosing a region S. Then

by Green's theorem,

J1(p", + Qy) dxdy = !cPdy - Qdx

{T ( dY dX) dx dy
= 10 P dt - Q dt dt, but P = dt ' Q = dt

= loT (xi; - i;x) dt == 0

where x == dx/dt etc ... , which is a contradiction. (QED)

Theorem 7.6. A L. C. must enclose at least one critical point.

Proof. Again, by contradiction, using Green's theorem (see Hirsch & Smale 1974).

Theorem 7.7. (Poincare-Bendixson). Let, be an orbit lying in a closed bounded

region R containing no critical points of x = f(x). Then either, is a closed orbit,
or it approaches a closed orbit as t -+ 00, or terminates at an equilibrium point (see
fig. 7. 16).

o oFigure 7.16
152

Proof. Hirsch & Smale (1974) or Coddington & Levinson (1955). We shall not
reproduce this proof but rather illustrate it with an example.

Example 7.11. Consider the system (7.13) in the last example. The origin (0,0) is
clearly a critical points. Take R = {rl~ ~ r ~ n. By Theorem 7.6, it must enclose
a critical point. But this critical point must be excluded by Theorem 7.7. For r = ~,
I,
r > 0, the trajectory is winding out and for r = r < 0, it spirals inward, i.e. the
circle with r = 1 is the attracting L.C. R must thus be closed and bounded: any
curve 'Y starting in R is trapped in this region for ever: it could either be a closed
orbit (if'Y starts on the circle with r = 1) or approaches a closed orbit (r = 1 in our
example), as t -? 00.

Economic Application I: Kaldor's Trade Cycle Model.

Kaldor's (1940) Trade Cycle model, elaborated by Ichimura (1954) and analyzed
rigorously by Chang and Smyth (1971) provides an excellent application of limit
cycle.
Kaldor assumes that national income (Y) rises in response to the excess of in-

=
vestment I(Y, K) over saving S(Y, K) where both I(Y, K) and S(Y, K) are assumed
to be analytical functions of Y and capital (K), and I k by definition. Thus the
model is
€Y = I(Y,K) - S(Y,K)
k = I(Y,K) (7.15)
= a = a constant positive speed of response and 1,11/(= {)I j{)Y etc.), S,
° °
where €-l
S1/ > with S1/ - 11/ 0« 0) for Y < Y1 (Y > Y2) and 1- S = at Yo, Y*, Y3 with
>
Yo < Yi < Y* < Y < Y 2 3 (see fig. 7.17).

I,S S(Y,K)
I(Y,K)

Figure 7.17. Kaldor's Trade Cycle

Kaldor justifies his assumptions of the sigmoid (S-Shaped) I and S functions

by the observation that I is less responsive to rising income at low levels because
 153

of excess capacity and at high levels because of market saturation. Similarly, at

high income, 5 rises steeply because of consumption saturation. This results in 3
equilibrium points: an unstable Y* (at which 5 - 1= 0,0 < 51/ - 11/)' sandwiched
between 2 stable equilibria at Yo (where 1-5 = 0 < II/ - 51/) and Ya (where
1-5 = 0 < 51/- 11/)' Ichimura's (1954) rigorous analysis of Kaldor's model remains
rather unnoticed until Chang and Smyth (1971) reformulated it and showed the
existence of L.C. This provides an interesting application of Poincare-Bendixson's
theorem 7.7 above. Kaldor's assumptions, together with Chang & Smyth's 5,. < 0,
I,. < 0, lead to

dK = _ II/ > 0: the slope of the k = 0 isocline

dY IK=O h is positive for all income levels,

dK _ 51/ - I" < 0 for high and low income

dYIY=o - h = 5,. > 0 for "normal" income level
i.e. the Y = 0 curve slopes upwards for "normal" (middle) income and downward
for very low and very high income levels (See fig. 7.18).
The Jacobian A of the linearization is

At (Y*, K*), tr A = 0(11/ - 5,,) + J,. > 0, det A> 0: the critical point is unstable.
Consider the subset U of R2

U = {(Y, K) : 0 ~ Y ::; y, 0 ~ K ::; R}

~ ____ ~ ____ ~L- ______ ~ ____- + y

Figure 7.18. Kaldor's Limit Cycle

which is the rectangle oyeR in fig. 7.18. Clearly the vector field on U points
inwards and (Y*, K*) enclosed in U is unstable. Any curve starting outside U must
eventually enter U, as shown by the arrows, and once in U, cannot leave U. Since
this critical point is simple (no zero eigenvalues since det A > 0), the linearized
154

system is either an unstable focus or node. Furthermore, any point starting in the
neighbourhood N2 E (K*, Y*) must cross the ellipse from inside to outside, and no
point would cross from outside to inside the ellipse. Hence the limit set is closed and
non-e,mpty. Furthermore, this limit set consists of regular points only (i.e. points
where Y '" 0 '" K). Thus, by Poincare-Bendixson's Theorem, either the trajectory
or its limit set is a periodic orbit. (QED)
There are large numbers of economic applications of L.C. such as Rose (1967),
Torre (1977), Schinasi (1982) Wolfstetter (1982) among others. Torre, for example,
examines the IS-LM Keynesian model where

Y = aF(Y, R) == a[I(Y, R) - S(Y, R)]

il = ,8[L(Y, R) - Ls]

where national income (Y) rises in response to the excess of Investment I(Y, R) over
saving S(Y, R) and interest rate (R) rises in response to the excess of money demand
L(Y,R) over money supply Ls. The I,S,L functions are assumed to have the usual
properties Ir < 0 < Iy ; Sy, Sr > 0, Lr < 0 < Ly and I, S are I, S are of a sigmoid
form (S-shape, like Kaldor's). Under these conditions, Torre showed that all the
Poincare-Bendixson's conditions are fulfilled and hence the above economy exhibits
a limit cycle.
L.C. theory is also used as a tool of investigation in many biological models but
space limitations do not allow us to go into them here.

7.5. The Lit~nard- Van der Pol Equations

and the Uniqueness of Limit Cycles

Two best known examples of L.C. are the Lienard-Van der Pol's equations.
We shall briefly discuss them and show how they are applied in Economics. The
Lienard's equation is one of the form

x + g'(x)± + h(x) = 0 (7.16)

or, in alternative form,

± = y - g(x) (7.17)
iJ = -h(x)

where g(x) == J; g'(x) du (i.e. g'(x) = dgjdx) is an even function (i.e. g( -x) = g(x))
with
 155

g(z)

----~------~r_--~--+_---z

(a) g(z): an odd function

g'(z) == dg/dz

-----+-\-+--+----1--I--+-++----z·

(b) g'(z): an even function

Figure 7.19. g(x) and g'(x) of Lienard's equation

(i) g(x) = 0 at x = 0 and x = ±i (see fig. 7.19)

(ii) g(x) -+ 00 as x -+ 00 Vx >i

(iii) h(x) is an odd function (i.e. h(-x) = -h(x)) with xh(x) > 0 for all x '" o.
The Van der Pol's equation is the particular case of the Lienard's equation with
g(x) == z; -
x (and g'(x) = x 2 - 1). For simplicity, take h(x) = x.

Theorem 7.8. (Lienard). The Lienard equation described above possesses a

unique stable L. C. attracting to itself the unstable focus located at the origin.

Proof. Levinson & Smith (1942), Coddington & Levinson (1955) Hirsch & Smale
(1974). The proof is involved, but we shall sketch it very briefly, leaving details
available in the above sources, among others, to interested readers.
First note that g(x) and h(x) are both odd functions i.e. if (x, y) is a solution, so
is (-x,-y), i.e. the phase diagram is symmetric about the origin. Take h(x) = x
for simplicity.
The slope of the trajectory

dy -x
=
dx y-g(x)

is horizontal on the y-axis (where x = 0) and vertical on the line x= y - g(x) = 0

(see fig. 7.20)
156

x=o
Figure 7.20. The Lienard's unique L.C.

Above x = 0 isocline, x > 0 and below it, x < o. Also iJ < 0 for x > 0, iJ > 0 for
x < 0, and iJ = 0 for x = 0, on the y-axis. Let us start from point P on the positive
portion of the y-axis where y > 0, x = O. To the right of it, in zone A, iJ < 0 < x
and hence the trajectory 1 moves in the south East direction, until it reaches the
x = 0(= y - g(x)) isocline say at Q, which it must cut vertically. Below the x = 0
isocline, in zone B, x < 0, iJ < 0, so 1 must move in the South West direction until
it meets the y-axis (y < O). which it must cut horizontally, say at R, to move into
zone C. By virtue of the skew symmetry of the vector field (x, y) = (y - x 3 + x, -x)
the curve 1 on RSPI is the mirror of the portion PQR, where PI is the first time
1 returns to the y-axis, considered as a transversal (see fig. 7.15). Thus, curve 1,
starting at P, can be considered a mapping O'(P} and on first return PI = O'(P}. It
remains to show that PI = P i.e. O'(P) = P, a fixed point, O'(P} mapping into itself,
iff P is on the L.C. In this case, the point of second, third, ... , return, P2 , P3 , .••• will
be the same point i.e. PI = P2 = P3 = ... = P iff we have a limit cycle. It can also
be shown that this L.C. is unique.

Economic Application II: Kaldor's Model as a Lienard Equation.

Kaldor's model in (7.14) could be turned into a single equation of second order
in the usual way, by differentiation Y and substitution in (7.14). This gives

(7.18)

which is a Lienard equation of the forms (7.15) except that h(Y, K} _ -0:(/,. -
S,.)/(Y, K) involves K. To apply Lienard theorem, K must somehow be eliminated.
One way to do this is to assume the production to be of Harrod-Domar fixed co-
efficient type, K = vY where v is the constant capital-output ratio. Another way,
suggested by Gabisch and Lorenz (1987), is either to assume that Investment is in-
dependent of K i.e. 1 = I(Y) or k = S(Y). In this case, (7.17) will be, in deviations
 157

terms (k == K - K*, z == I - r, z' = dIldY, y == Y - Y*)

jj - a(z' - s')iJ - az's(y) = 0 (7.19)

which is a standard Lienard equation, with g'(x) == a(z'-s') and h(x) == -az's(y). It
is easy to check that g'(y) < 0, s(y) ~ 0 depending on whether y ~ 0 and -z'(y) > 0
for all y, by assumption and hence g'(y)y == az's(y)y > 0 'fIz '" O. g(y) = J~ a(s'-
z') du = a(s - z) and lim!l~oo g(y) = 00 and J~ h( -a')s dy = a( -z')J~ s du -+ 00
as y -+ 00. Hence there exists a unique L.C.

7.6. Linear and Nonlinear Maps

A parallel analysis to the continuous DS above can be carried out for diffeomor-
phisms. The major differences between the two can be seen by referring to those
between differential and difference equations in Chapters 2 & 3 and 5 & 6 above.
Consider the map x 1-4 g(x), x ERn, 9 : Rn -+ Rn in (7.2)' above, whose
associated linear map, obtained by the linearization method (discussed in 7.2) about
X, is
Y 1-4 Ay, y ERn, A = Dg(x).
The eigenspace of A is composed of the stable EB, unstable EU and central EC
eigensubspaces where

EB = span{nB eigenvectors associated with eigenvalues of modulus < 1, i.e.

I>'d < 1, i = 1,2, ... ,s}
EU = span{n u eigenvectors associated with I>'jl > 1, j = 1, ... , u}
EC = span {nc eigenvectors associated with I>'k I = 1, k = 1, ... , c}
where ns + nu + nc = n. Orbits in EB are contractionary or stable, those in EU are
expansionary or unstable and finally those in EC are in the central manifold.

Definition. A map x 1-4 g(x) is said to be hyperbolic if it has no eigenvalues on

the unit circle i.e. no 1>.;1 = 1, for all i.

Theorem 7.9. Hartman-Grohman's Linearization Theorem. Let x be a

hyperbolic fixed point of a C' diffeomorphism 9 : Rn -+ Rn. Then there exist a local
stable and unstable smooth manifold WB(X) and WU(x) tangent to the eigenspaces
EB(X) and EU(x) of Dg(x) at x (see fig. 7.21). Locally, in the neighbourhood of
x the linear and nonlinear systems are equivalent, more precisely, there exists a
homeomorphism h defined on the neighbourhood Ne(x) of X such that hog = DGoh.

Proof. Hartman (1964) or Nitecki (1971) or Arrowsmith & Place (1990).

158

Note that (i) W·, WU, E·, EU in the theorem are all local. Global counterparts
are unions of these. (ii) orbits of flows are continuous curves in Rn whereas orbits of
maps are discrete successions of points. E.g. p ~ g(p) ~ g2(P) etc. (see fig. 7.21).

Figure 7.21. Stable and unstable manifolds

The comparative features of flows and maps, the location of their eigenvalues
and their resulting orbits are summarized in Fig. 7.22.

Figure 7.22. Hyperbolic flows and Diffeomorphisms

Flow fiJt of ± = f(x)

+.
Orbits Diffeomorphism x ~ g(x)

If -$-
ImA

(a)

(b)
+.
*~ +.
ImA

ImA
-$-
(c)
-$-
~ +. -$
ImA

(d)

,( +. 4r
ImA

(e)
~
 159

Are two-dimensional DS structurally stable? Peixoto's theorem provides the

answer to all possible cases.

Theorem 7.10. (Peixoto). A C r -vector field on a compact two-dimensional man-

ifold is structurally stable if and only if

(i) all fixed points are hyperbolic

(ii) all closed orbits are hyperbolic

(iii) there are no orbits connecting saddle points

(iv) the non-wandering set consists only of fixed points and periodic orbits where,
for a given point p, a non-wandering set n is defined as a set of points in its
neighbourhood N such that the flow ¢h (N) n N =F </J or for map g, gn (N) n N =F
</J, for large t or n.

Proof. Peixoto (1962).

For map, Peixoto's theorem is stated as follows.

Theorem 7.11. (Peixoto) . A diffeomorphism 9 is structurally stable iff its non-

wandering set consists of finitely many fixed points or periodic orbits, all of which
are hyperbolic.

Proof. Peixoto (1962).

7.7. Stability of Dynamical Systems

7.7.1. Asymptotic Stability

It will be recalled (sections 5.3 and 5.6 of Ch. 5) that if x(t) is any solution of
i: = f(x) i.e. f(x) = 0 or of any map x 1-+ g(x) i.e. gn(x) = x for n -+ 00, then
x(t) is said to be stable if solutions starting close to x(t} remains closed to x(t} at
all future times. If in addition, these solutions converge to x(t} as t -+ 00, then x(t}
is said to be locally asymptotically stable. If this convergence takes place from any
initial position, in other words, if the distance between x(t} and any other solution
"shrinks" over time, global stability obtains. This distance function is referred to
as the Liapunov function (see Definition 5.4 and Theorem 5.5).
When solutions are closed orbits, asymptotic stability refers to periodic stability
i.e. the property the orbit has to attract neighbouring curves. Thus, we have
160

Definition 1.5. If <Pt is the flow of ± = f(x) and the solution curve, C W (where
W is an open subset of RR) is a closed orbit of the flow, then, is said to be
asymptotically stable if
lim d[<pt(x),,] = 0
t-+oo

i.e. if the distance (d) between the flow <Pt(x) and the closed orbit, decreases to
zero when t -+ 00. The orbit, is then said to be a periodic attractor: , attracts
neighbouring solution curves to itself. Note that this definition also holds for maps.

It can be shown (see Hirsch & Smale (1974) p. 277) that if, is an asymptot-
ically stable closed orbit of period T, i.e. limt-+oo I<PT+t (x) -<pt(x)1 = 0 then, has
neighbouring .curves with asymptotic period T. Also if p E , and the linear map
D<PT(p) has n -1 eigenvalues of modulus < 1, then, is asymptotically stable. This
condition IAil < 1 also holds for maps.

7.7.2. Structural Stability

Roughly speaking, two nearby flows or maps are said to be topologically equiva-
lent if they exhibit the same qualitative properties, for example Saddle points, sink
or source at some critical point x, and structural stability refers to the capacity of
the system to preserve its qualitative features under perturbation. More precisely

Definition 1.6. Two dynamical systems are said to be topologically equivalent if

one could be carried into the other by a homeomorphism, i.e. a continuous map
having a continuous inverse, in such a way as to preserve the same topological
structure.

Definition 1.1. A dynamical system is said to be robust or structurally stable if

it preserves the same topological structure under perturbation, i.e. if its perturbed
flow or map is topologically equivalent to its original one.

Definition 1.8. A point x is said to be non-wandering if it has a neighbourhood U

such that for some t E R, <Pt(U) n U '" <P for flows and gR(U) n U '" <P for invertible
maps. Roughtly speaking, it says that a point x is non-wandering if it stays in its
neighbourhood all the time. The set of all such non-wandering points is called the
non-wandering set.

When does a dynamical system possess structural stability? For the two-
dimensional case, Peixoto has provided the answer which summarizes much of im-
portant earlier work.

Theorem 1.10. (Peixoto 1962).A vector field on a compact two-dimensional man-

ifold is structumlly stable if and only if

(i) all fixed points are hyperbolic

 161

(ii) all closed orbits are hyperbolic

(iii) there are no orbits connecting saddle points

(iv) the non-wandering set consists only if fixed points and periodic orbits.

Proof. (Peixoto 1962). The theorem should be clear from the above discussion
except (iii) which would require some elaboration. Suppose a flow f,.(x} or map
g,.(x}: Rn ~ Rn depend continuously on some parameter J.l E R. Then for (iii),
referred to as homoclinic, it is easy to show that.a slightest perturbation caused by
a change in J.l past some critical level J.lo, could break the saddle connection into
a focus or periodic orbit (see fig. 7.23) and thus change the system's topological
structure.

(b) J.l = J.lo

Figure 7.23. Structural instability of a saddle connection
(a) J.l < J.lo; (b) J.l = J.lo; (c) J.l > J.lo

Theorem 7.11. (Peixoto).A diffeomorphism g( x) is structurally stable iff its non-

wandering set consists of finitely many fixed points or periodic orbits, all of which
are hyperbolic.

Proof. Peixoto (1962).

7.8. Conclusion

In this chapter, we have discussed nonlinear Dynamical Systems at some length,

and always at an elementary level where simplicity and clarity are sometimes
achieved at the expense of rigour. We have analyzed the Linearization theory in
some detail, discussed the qualitative solutions, illustrating the presentation with
a number of applications and examples in Economics and Biology. The discussion
has generally concentrated on continuous systems where the flow of the vector field
received most attention. However, maps were not neglected, especially where diffeo-
morphism plays an important part. Finally, stability was studied for both flows and
maps, not only the asymptotic stability of fixed points and closed orbits, but also
162

structural stability which threatens to destroy the existing topological structure of

the system. This is in preparation for later chapters where bifurcation, catastrophe
and chaos will be studied.
Each Dynamical System has its own characteristics and properties. Some impor-
tant ones are the Gradient Systems, Lagrange Systems and Hamiltonian Systems.
These will be discussed in the next chapter.
Chapter 8
Gradient Systems, Lagrangean and
Hamiltonian Systems

8.1. Introduction

In this chapter, we shall examine some important dynamic systems (DS) which
are widely used in many fields such as Economics and Biology. These are the Gradi-
ent Dynamic Systems (GDS), Lagrangean Dynamic Systems (LDS) and Hamiltonian
Dynamic Systems (HDS). We shall briefly discuss the major characteristics of each
system in turn and present some applications.

8.2. The Gradient Dynamic System (GDS)

Let U be a subset of R" and V(x) : U - R be a function from the state space of
n dimensions to the real line, called a potential function (in reference to the potential
energy in Physics). Assuming V(x) is twice differentiable, then the gradient of V(x)

grad V(x) == DV(x) == (8V/8xt, ... , 8V/8x n )

is the vector of first partial derivatives of V(x) and D2V(X) _ [8 2V/8x;8xj] =

Hessian of V (x) is a symmetric matrix.

Definition 8.1. A gradient system on an open set U of R" is a dynamic system of

the form
x = f(x) = -grad V(x) (8.1)
where V(x) : U - R is a potential function.
In Physics, for example, f(x) in (8.1) is a vector assigned to point x, which is
a force acting on a particle at x. In economics, an example of GDS is P = f(p) =
-grad 1r(p) where p is the price vector and 1r(p) is a profit function. It will be
shown later that -grad 1r(p) is simply the excess demand function in a Walrasian
model. The negative sign is conventional: it could be changed to suit maximization
problems, i.e. grad [-V(x)] = -grad V(x). Thus (8.1) simply says that the velocity
vector field is the gradient field of a potential function V(x).

Theorem 8.1. V(x) ~ 0 and V(x) = 0 iff x is an equilibrium of (8.1).

Proof. V(x) = (DV(x),x) = (grad V(x),-grad V(x)) = -Igrad V(x)12 < 0

(QED)
164

If x* is a critical point i.e. f(x*) = 0, then grad V(x*) =

the potential function V(x) acts as a Lyapunov function.
°
and V(x*) = 0. Thus,

Theorem 8.2. At regular points (where f(x) '" 0), the trajectories cross level
curves V(x) = c; (i = 1,2, ... ) orthogonally. Critical points x* at which f(x*) =
are equilibria. Isolated minima are attracting basins and are asymptotically stable.
°
Proof. Hirsch & Smale (1974).

Theorem 8.3. At a critical point of a GDS, all eigenvalues are real, which excludes
spiralling nodes and limit cycles.

Proof. This follows from the fact that Df(x) = H(V) = Hessian of V(x), which
is a symmetric matrix. Symmetric matrices can only have real eigenvalues (see Ch.
4). Hence no periodic solutions are possible. (QED)

This is a very useful result: in a DOS, we only need to look for maxima, minima
and saddle points. No limit cycles, no fluctuations are possible since the trajectories
always seek minimum points which they reach as fast as possible.

Example 8.1. V(x) = ~ xt - x~ + x~ + t X~j x = f(x) = -grad V(x) =

[-Xl(Xl - 1)(Xl - 2), -X2J.
Clearly this system has 3 critical points Xl = (0,0), X2 = (1,0), X3 = (2,0) at
° °
which f(x) = i.e. at which {)V/{)Xl = +Xl(Xl - l)(xl - 2) = = {)V/{)X2 = X2.
The derivative Df(x) is

Df(x) =_[
-
{)2V ] =
{)Xi{)Xj -
[-V1l
- ~l
-V12]
- ~2

= [ -3x~ + 6Xl -
° 2 °]
-1
where V;j == {)2V/{)Xi{)Xj (i,j = 1,2). At the three critical points x l ,x2,x3, Df(xi )
are Df(O, O) = [-~ _~] j Df(l,O) = [~ _~] j Df{2,0) = [-~ _~]. Clearly
V(x) has a minimum at xl = (0,0) and x3 = (2,0) separated by the saddle point

° °
x2 = (1,0) which has a maximum in the xl-direction at Xl = 1 and a minimum in
the x2-direction at X2 = i.e. X2 = everywhere on the x - V plane (see fig. 8.1.(a)
and 8.1.(b».

°
It can be seen that at these 3 critical points, the level curves V(x) = c; (i = 1,2,3)
are V(O,O) = Cl = 0, V(2,0) = C3 = and V(l, 0) = C2 = 1/4. In this example, the
phase space has two attracting basins at (0,0) and (2,0) which are separated by a
saddle point which is a ridge at (1,0). The insets (sets of all initial points which
eventually end up at an equilibrium point) are the stable arms of the SP. They act
as separatrices to separate the two attracting basins.
Note also that the gradient vector field, -grad V(x), is orthogonal to the level
curves V(x) = c; where c; (i = 1,2, ... ) are the constant heights of V(x) at the
various places (five such heights, are shown in fig. 8.1.{a). Fig. 8.1.{b) is the
projection of fig. 8.1.(a) on the Xl-X2 plane.
 v(x) 165

Figure 8.1.(&). The potential function V(z)

Figure 8.1.(b). Projection on Z1-Z2 of V(z)

Gradient Systems in Economics.

Example 8.2. Consider the typical problem of minimizing production cost (w,x)
subject to a given output level q = J(z) : If' -. Rj (w,z) E If' where z is an
n-vector of inputs and w its constant rental (or wage) vector. The problem is one
of constrained cost C (z) minimization, i.e.
C(z) = w'x + ~[q - J(z)]
where ~ is the usual Lagrange multiplier. The dynamic law is
:i: = -grad C(x) = -(w - ~f')

i.e. factor hiring moves in the direction of decreasing costs. Theorem 8.1 gives
6(x) = DC(x):i:
= (w - ~f'), -(w --: V'))
= -(w - ~J')2 :5 O.
The movement of x stops when 6(x) = 0 i.e. when w = ~J', the usual equilibrium
conditions. It is easy to verify that second order conditions are fulfilled.
166

Example 8.3. Consider the problem of profit maximization II(x) = pf(x) - w'x
where P = constant output price, x E R" is the input vector and w E R" its rental
vector assumed constant, f( x) is the usual concave production function f" < 0 < f'.
The dynamic law is
x = grad II(x) = pf' - w

i.e. factor hiring moves in the direction of profit increase. Theorem 8.1 gives, for
this maximization problem,

iI(x) = DII(x)x = (Pi' - W)2 ~ 0

i.e. factor hiring continues so long as iI( x) > 0 and stops when iI( x) = 0 => PI' = w
i.e. when the value of marginal factor product (PI') is equal to factor rental (w) :
II(x) then reaches its maximum. This is easily verified by examining the Hessian of
II(x) i.e. H(II) = Pi" is negative definite for any concave production function f(x).

Example 8.4. GDS in a LeontieC economy. Consider a Leontief economy

producing n commodities q E R" using a fixed technology Aq where A == [aij]
(i,j = 1,2, ... ,n) with 0 ~ aij ~ 1 Vi,j. The profit function V(p,q) to be maxi-
mized is total revenue (p, q) minus total cost (p, Aq) i.e. V(p, q) == p'(I - A)q.
In order to apply the GDS, we need some market laws. These have been provided
by Walras and Marshall:

(i) as price Pi ~ cost C;, Pi falls or rises

(ii) as Pi ~ c;, quantity qi rises or falls

(iii) as demand di ~ supply q;, qi rises or falls

(iv) as di ~ q;, price Pi rises or falls.

The gradient field V(p,q) is (Vq,Yp) where Vq _ (~~, ... ,:~);

Yp == (:~ , ... , ::,Jyields a basin of attraction, as noted by Goodwin (1987) with
asymptotic approach to Grad V = 0 where equilibrium is reached, from any arbi-
trary initial conditions. At grad V = 0, all prices (p) are equal to cost (pA) and
all output (q) produced just satisfies demand (Aq). Thus, prices fall to their equi-
librium level and output rises to its maximum. For each subsystem of output and
prices, we have the gradient system (see Goodwin 1987).

p = - Yp = -(I - A)q

q= Vq = (J - A')p.
 167

8.3. Lagrangean and Hamiltonian Systems

Definition 8.2. A dynamic system of the form

d 8L 8L .
-d -8' - -8
t qi q;
=0 (z = 1,2, ... ,n) (8.2)

is called the Lagrangean Dynamic System (LDS) where L(q,q,t) E C 2, (q E R"

and q == dqj dt) is called the Lagrange equation. Equation (8.2) is also called Euler-
Lagrange equation or just Euler equation. It is a system of n second order differential
equations.

Definition 8.3. A dynamic system of the form

(8.3)

is called a Hamiltonian Dynamic System (HDS) where H(p,q,t) == pq - L(q,q,t)

is called a Hamiltonian function and L(q,q,t) is the Lagrangean equation in (8.2).
It is a system of 2n first order differential equations (8.3) is called a conservative
Hamiltonian system with n degrees of freedom.

In Classical Mechanics, the state of a system is specified by its generalized posi-

tion q E R" and its velocity q (== dqjdt) E R". In Growth Economics, q represents a
vector of capital goods and q its accumulation or investment. The system is called
holonomic if each coordinate qi could be independently varied. The number of such
independent variations is called the number of degrees of freedom of the system.
LDS describes such a system. HDS describes the motion of a point in the (p, q)
coordinate system where q E R" is the generalized coordinate system and pER"
the generalized momenta. In optimal Growth Economics, for example, q often rep-
resents the vector of capital goods and p the shadow price of its accumulation.
In fact, the LDS of (8.2) is the extremum of the functional

J= loT L(q,q,t)dt (8.4)

which is

SJ = loT [L(q + h, q + h, t) - L(q, q, t)] dt

fT .
= 10 (Lqh + Lcjh) + O(h2) (8.5)

where Lq == 8Lj8q, Lcj == 8Lj8q etc.... But

fT. JT d
10 Lcjhdt = - h dt(Lcj)dt + hLcjl~ (8.6)
168

by integration by parts. Since there are no variations at the end points i.e. at t =0
and t = T, h(O) = 0 = h(T), substitution of (8.6) into (8.5) gives

oj = loT [!(Lq) - Lq] h(t)dt = O. (8.7)

This is the necessary condition for an extremum of (8.4). More formally, we have

Lemma 8.1. If g(t) is a continuous function in [0, T] satisfying If g(t)h(t) dt = 0

where h(t) is any continuous but arbitrary function satisfying h(O) = 0 = h(T), then
g(t) == O.

Proof. Suppose g(t) -:F 0, say g(t) > 0 in [0, T]. Then by continuity, g(t) > 0 for
some interval [a, b] in [0, T]. Let h(t) == (t - a)(b - t) \:It E [a, b] and h(t) = 0 "It ¢
[a, b]. (See fig. 8.2.) Clearly h(t) satisfies all the conditions of the Lemma. But then
If g(t)(t - a)(b - t) dt -:F O. This contradiction proves the Lemma. (QED)

h t)

--~O--~a--~--~--t

Figure 8.2. Function h(t) of Lemma 8.1

Theorem 8.4. The curve "y : q = q(t) is an extremal of J in (8.4) on the space of
curves passing through two fixed points q(O) = qo and q(T) = qT if it satisfies the
Euler equation
d
-L·-L
dt q q
=0 (8.8)

Proof. The necessary condition is oj = 0, which by (8.5) and (8.6), is (8.7). Iden-
tifying the expression in the square brackets of (8.7) with the function g(t) of the
Lemma completes the proof. Thus, we must have for (8.7), the Euler equation
d
dtLq - Lq = 0 (8.8)

which is (8.2) in matrix form. (QED)

Theorem 8.S. The LDS in (8.2) and the HDS in (8.9) are equivalent to each other.

Proof. Define p( q, q, t) == Lq and assuming Lqq is non-singular, the transformation

p toq and vice versa is one to one. Define the Hamiltonian function H as
H(p, q, t) == P4 - L(q, q, t) (8.9)
dH = Hpdp+ Hqdq+ Htdt
 169

but dH = qdp - Lq dq - Lt dt.

Equating the two gives

q= H"
Hq = -Lq =-p (8.10)
Ht = -Lt == -oL/at
where Hq == (:~, ... , ::~.) etc ... , and Hq = -Lq = -p follows from the Euler
it
Lagrange equation (8.8) where p == Lq = Lq • (8.10) is called the canonical form of
the Euler equations. (For further details, see Tu 1984 or 1991 p. 72). Hence if q(t)
satisfies the LDS then (p(t), q(t» satisfies the HDS. Similarly the converse could be
proved.
Example 8.5. Optimal Economic Growth model. Consider the neo-classical eco-
nomic growth of Swan (1956) and Solow (1956), optimized by Cass (1966) and
others. It consists of optimizing the functional J(k) where

J(k) = loT u(e)e- 6t dt (8.11)

where
e(t) = f(k) - >.k - k, k(O) = ko (8.12)
u(e) == u[f - .U - k] is the consumption utility function, increasing
and concave, i.e. u"(e) < 0 < u'(e)
f(k) = per capita output, f" < 0 < f'
A = constant depreciation (p) and population growth (n) rates,
i.e. A = p + n, constant
k == dk/dt = per capita investment.
Defining u(e)e- 6t == u(f - >.k - k)e- 6t == F(k, k, t).
(8.13)
Euler-Lagrange equation (8.1) or (8.8) gives
d d
0= FIc - dt Fi; = e- 6t [u'(e)(f' - A) + dt u'(e)]

the solution of which gives

c= - u'(e) [f'(k) - A - 6]. (8.14)

u"( c)
The same model gives the Hamiltonian function
H(k, q, t) == e- 6t {u(e) + q[J(k) - Ak - e]} (8.15)

where p(t) == qe- 6t = the co-state variable and k(t) is the state variable, representing
the stock of capital per worker. Note that if utility is a linear function, i.e. u(e) = e,
then (8.15) is simply
170

which is the discounted per capita GNP, composed of the value of consumption
(c) and of investment (k) measured at price qe- 6t == p(t) in terms of the price
of consumption (c) taken as a numeraire. Thus p(t) == q(t)e- 6t is the generalized
momentum, i.e. p(t) = 8L/8k where k is the generalized coordinate (with k == dk/dt)
of this economic system.
The HDS given by (8.15) is

k = Hq = f(k) - >.k - c which is (8.12) (8.16)

q = -Hie = -[f'(k) - A - t5jq.

Optimal c is obtained by He = 0 =* u'(c) = q(t), u"(c) = q substituting q from

(8.16) and dividing the LHS by u'(c) and the RHS by q, gives

u"(c) C= 2 = -[f'(k) - A - t5j (8.17)

u'( c) q

which is exactly (8.14). Thus the LDS and HDS are equivalent to each other: they
give the same results.

8.4. Hamiltonian Dynamics

Definition 8.4. The Hamiltonian function H(q,p) is said to be autonomous or

conservative when t does not enter it explicitly (to refer to the law of conservation
of energy where the sum of kinetic and potential energy is constant), and H(p, q, t)
is said to be non autonomous.

Theorem 8.6. In conservative HDS, dH / dt = 0 and in non autonomous HDS,

dH/dt = 8H/8t.

Proof.

if(p,q) = Hqq + Hpp

= HqHp - HpHq == 0 by (8.10) (8.18)
if(p, q, t) = Hqq + Hpp + Ht
= HqHp - HpHq + Ht

I.e.
if == dH(~~q,t) = 88~ == Ht • (QED) (8.19)

Definition 8.5. The 2n dimensional space with coordinates q E Ir', p E Ir' is

called phase space.
 171

8.4.1. Conservative Hamiltonian Dynamic Systems (CHDS)

A CHDS is a vector field: at each point (p, q) of the phase space, there is a
2n-dimensional vector X h == (-Hq , Hp) which is called the Hamiltonian flow, i.e.
putting x == (q,p) and grad H == (Hq, Hp),

x= Xh = Jgrad H(x) (8.20)

where

J == [-~n ~]. (8.21 )

Note that (8.20) is just a compact way of writing (8.3). Note also that J' = J-1 =
-J where J' is the transpose of J, and JJ = J2 = -I2n • Finally, note that (8.20)
looks a bit like the gradient system (8.1) but it is very different. While (8.1) is an
inner product, (8.20) is a symplectic form. Without going into Symplectic Geometry
and Lie algebra, (see Arnold 1978, Abraham and Marsden 1978 for example), we
note simply that the sympletic area of the parallelogram defined by two vectors u
and v is given by the skew product

ul\v=(Ju).v (8.22)

and

~(Ul\v) = (Ju)·v+(Ju)·v
= (JJHu).v+(Ju)·(Jv)=O (8.23)

where H == [8 2H/(8x i 8xj)] == [8 2H/(8q,8p)] == D2H (where the double bar =

above H indicates a matrix of second derivatives) i.e. H == [8 2H/8x i 8xj] is the
Hessian of the Hamiltonian function H(x), and· indicates a dot (or inner) product.
Thus (8.23) says that the symplectic area is preserved by a conservative HDS. This
is shown by Liouvilles' Theorem which says that the X h of a conservative HDS
is volume preserving. We are not going into this here. Rather we shall stress an
important property of this symplectic form by a Theorem.

Theorem 8.7. If A is an eigenvalue of the Hamiltonian matrix J fi where fi is the

Hessian of the Hamiltonian function H(q,p), so is -A, where>. is either real or
complex, and hence L~n Ai = O.

Proof. Linearizing the Hamiltonian flow X h about its equilibrium point where
Hq = 0 = Hp set at the origin for simplicity, which amounts to approximating
the Hamiltonian function H(q,p) by its quadratic form ~ (x'fix) where x == (q,p),
we have
x=Xh=O+JHx==Mx (8.24)
172

where JH is called the Hamiltonian_matrix M. (In our notation, H(x) is called the
Hamiltonian function and M(= J H) is called the Hamiltonian matrix). Written
out in full, x = Mx in (8.24) is

(8.24')

We I!.0w sho,! that if A is an eigenvalue of J H, so is - A. Let A be an eigenvalue

of J H i.e. J H x = AX. Rememb~ring that ~'J = J J' = 12n i.e. J' = J-l and also
J J = - 12n , we can see that J( J H)J' and J H are similar matrices and as such have
the same eigenvalues i.e.
J(J H)J'x = AX
-liJ'x = AX or liJ'x = -AX
since Ii is sYI.!lIIlet!ic, i.e. (J Ii), = Ii' J' = Ii J'. Ii being the (sYIIlJ!.letric) Hessian
of H(q,p), JH = HJ' and it follows that if A is an eigenvalue of JH, so is - A.
(QED). For alternative proofs, see Kurz (1968) or Arnold (1978), Abraham and
Marsden (1978).
A very important implication of this theorem is that non-zero eip;envalues of J H
always come in pairs (A, -A). This, combined with the fact that H is real, having
real or complex eigenvalues, (X, -X) pairs also qualify. Thus, for a HDS with n(~ 2)
degrees of freedom, for example, writing A = a ± i/3 where a = Re (A), /3 1m (A), =
both a, /3 being real and i 2 = -1, we have the following types
(i) Pairs of real eigenvalues ±A(a '" 0 = /3) lying on the real axis and symmetric
about the imaginary axis;
(ii) Pairs of pure imaginary eigenvalues A = ±i/3 (a = 0 '" /3) lying on the imaginary
axis and symmetric about the real axis,
(iii) Quartet of complex eigenvalues ±A = ±a ± i/3 (a '" 0 '" /3), lying in the
open left and right complex plane (open in that the imaginary axis is excluded) and
symmetric about both the real and imaginary axes (see fig. 8.3).
(iv) Pairs of identical real eigenvalues A = (±a, ±a).
(v) Pairs of identical purely imaginary eigenvalues A = (±i/3, ±i/3).
(vi) Pairs of eigenvalues A = (±O, ±O) all lying at the origin.
1m (~) =f1

case (i) case (ii)

 173

-X. • ,\ =0 + ifJ

--------+--------0

-,\ • • X=0 - ifJ

case (iii) case (iv)

--------+--------0

case (v) case (vi)

Figure 8.3. Double symmetry of conservative HDS:

(i) pairs of real eigenvaluesj (ii) pairs of purely imaginary eigenvaluesj

(iii) quartet of complex ,\j (iv) pairs of identical real ,\j
(v) pairs of identical purely imaginary ,\j (vi) pairs of zero '\.

It is clear, from this double symmetry, that simple HDS (i.e. detM ¥ 0) with
one degree of freedom must fall into of the first two categories. This fact could be
formulated as a Theorem (which is just a Corollary of Theorem 8.6), as follows:

Theorem S.S. A simple critical point of an autonomous (or conservative) HDS

with one degree of freedom (q E R,p E R) could only be a Saddle Point (SP) (case
(i)) or a centre (case (ii)). In other words, the eigenvalue pair must either lie on the
real axis, symmetric with respect to the imaginary axis, or on the imaginary axis,
symmetric with respect to the real axis. There are no other possibilities (except the
excluded case (vi) of non-simple eigenvalues).

Proof. Linearizing the HDS about the equilibrium point (q*, p*) at which Hr. = 0 =
H q , we have, as in (8.24)
(8.24)
or, in full

'""
[ pIi] ,.., [a b ] [ q - q* ] _ [ Hpq Hpp ] [ q - q* ]
-c -a p-p* ...., -Hqq -Hqp p-p*
174

whose characteristic equation e(A) = A2 + be - a2 = 0 gives

A= ±v'a2 - be
which is a SP if a 2 - be > 0 and a centre if a 2 - ba < O. (Note that in the excluded
case (vi), a 2 = be and A = (0,0), at the origin). (QED)

Corollary 8.7. If the Hamiltonian function H(q,p) is concave in q an convex in p,

the only critical point of a conservative HDS with one degree of freedom is a S.P.

Proof. Concavity convexity of H implies Hqq =

e < 0 < b= Hpp leaving us with
the only alternative a 2 - be > 0 i.e. Ab A2 are real and of opposite signs. (QED)

Note that this corollary is a typical case in the Optimal Growth literature where
H(q,p) is concave in capital (q) and convex in shadow price (p). This is a key
assumption of Hamiltonian Economics (see Cass & Shell 1976).

8.4.2. Perturbed Hamiltonian Dynamic Systems (PHDS)

While autonomous Hamiltonian Dynamic Systems are commonplace in Physics

(for example, energy conserving and volume conserving Hamiltonian flows Xh), eco-
nomic systems are often non autonomous. In optimal economic growth models, for
example, this is due to the introduction of some rate of future discount (S): time is
money, future wealth must be discounted to give its present value.
a
Apart from some general properties such as dH (p, q, t) / dt = H (p, q, t) / at i- 0
i.e. unless the Xh is volume preserving (by Liouville's theorem), HDS differ from
one problem to another, depending on the way time t explicitly enters the Hamilto-
nian function H(p, q, t). Instead of discussing this problem in its generality, let us
analyze it with specific reference to the familiar optimal economic growth problem
of maximizing the integral of the discounted consumption utility function u(c)e- 6t
subject to the investment flow (as in (8.11) through (8.17)) but generalized to a
system of n degrees of freedom, i.e. k E R:', q E R:' instead, as follows

max loT u(e)e- 6t dt

subject to
k= f(k) - H(t) - e(t).
This gives rise to the Hamiltonian function H(k, q, t)

H(k,q, t) =e- 6t {u(c) + q[f(k) - H(t) - c(t)]

where p(t) =qe- 6t • This gives the dynamic system J (grad H)x, which is

k = Hq (8.25)
q = -Hi< + Sq(t).
 175

Linearizatio~ around the equilibrium k = 0 = q, set at the origin for simplicity,

gives x = JHx as in (8.24), or in full, denoting matrix transposition by-
( kq ) -_ [ Hqlc Hqq
-H"" -Hlcq +Hn
] [ k ]
q

or
(8.26)
where A == Hqlc(== 8 2 H/8q8k), B == Hqq , C = -H"". A,B,C are (n x n) real
matrices, with Band C both positive definite by the usual assumption that H(k, q, t)
is concave in k and convex in q, In is an (n x n) identity matrix and 0 a real discount
parameter.
Writing the matrix in (8.26) as

(8.27)

!
where A == A - In, M6 == [~ -i] , Mo == [~ _.!] .
Clearly M6 and Mo
(0 = 01. the undiscounted case) are Hamiltonian matrices having a symplectic form
like JH in (8.24) above, and hence possess the double symmetry property proved
in Theorem (8.6) and analyzed in fig. 8.3 above. Thus, the spectrum (or the set
of eigenvalues) of M6, are simply the spectrum of M6 shifted through 0/2, (see fig.
(8.4)), i.e. from (8.27),

1m I'

SP SP
tI tI

ReI'
-6/2 6/2

I instability
I
corridor

Figure 8.4. The instability corridor

let A and II. be an eigenvalue of M6 and M6 respectively, then A = II. + 0/2. But
M6 being a Hamiltonian matrix, has the double symmetry properties i.e if II. is an
176

eigenvalue of £16 , so are -1', p. and -p.. Writing I' == ±a ± i{3 in general, we have
>. = I' + 6/2 == ±a ± i{3 + 6/2
= ±a + 6/2 ± i{3 (8.28)
= Re (>.) + 1m (>.).

By shifting to the right through 6/2, it is easy to see, from fig. 8.4, that Re (>.) ==
±a+6/2 > 0 for 10'1 < 6/2 and Re (>.) have opposite signs for 10'1 > 6/2, as has been
pointed out by Kurz (1968). Thus, the perturbed Hamiltonian matrix M6 no longer
possesses the double symmetry of Mo. The distance 6/2 from the imaginary axis in
fig. 8.4 can thus be called the "instability corridor" and Kurz's (1968) theorem may
be formulated, by summarizing the discussion above, as follows.

Theorem 8.9. The PHDS x = M6X in (8.28) has the saddle point properties (SPP)
iff £16 has no pairs of eigenvalues inside the instability corridor. If it has, Re (>.) > 0,
the PHDS is unstable and disintegrates. Furthermore, it is not possible for (8.26)
to have all eigenvalues lying on the imaginary axis.

Proof. As above except for the last sentence. For all eigenvalues of M6 to be on
the imaginary axis, Re (>.) must be zero, i.e. -a + 6/2 = 0 = 0'+6/2 which is
impossible so long as 6 > 0, as has been pointed out by Kurz (1968).

8.5. Economic Applications

8.5.1. Hamiltonian Dynamic Systems (HDS) in Economics

HDS made its appearance in Economics literature in the 1960's when dynamic
optimization was formulated as a standard optimal control problem and the appli-
cation of Pontriagin's Maximum Principle (1962) naturally leads to the formulation
and solution of some Hamiltonian function H(q,p) with p = -Hq and q = Hp. By
1970's, the Hamiltonian approach to dynamic Economics became commonplace (see
Cass and Shell (eds.) 1976). Applications range from economic growth theory, fluc-
tuations, capital theory, dynamic profit, intertemporal production and consumption
plans, foreign investment, resource allocation, pollution, natural resources, portfolio
allocation, optimal financing and advertising, to name only a few. This approach
has attracted the attention not only of economists but also mathematicians like
Rockafellar (1976).
As an illustration of the Hamiltonian representation of the economy, take a typ-
ical optimal economic growth problem of maximizing intertemporal discounted (at
rate r) consumption (c) utility u(c) (u" < 0 < u'(c)) subject to some capital accu-
mulation law k = f( k) - nk - c where k is capital and f( k) is per capita production
function with f"(k) < 0 < f'(k). Application of Pont riagin's (1962) Maximum Prin-
ciple leads to the formulation of the Hamiltonian function H (k, q, r) = sup c { C + qk}
 177

where u(c) = c, which is precisely net national product (NNP), consisting of con-
sumption (c) and investment values (qk) where the discounted price (q) of investment
is in terms of consumption good (c) taken as a numeraire. Consumption (c) must be
chosen such as to maximize NNP over time. The HDS gives k = H" = f( k) - nk - c
which is the economic definition of net investment which is per capita production
f(k) net of population growth requirement (nk) (n is a constant population growth
rate) left over after consumption needs (c) are met. q = -Hie = -[f'(k) - n - 6]q
states that the returns to capital f'(k), net of population growth rate allowance
(n) and depreciation (6) are equal across capital goods. The existence of (k, q) is
guaranteed by Pontriagin's (1962) theorem and"its stability has been thoroughly
investigated, as has been seen in section 8.4.2 above. The properties of technol-
ogy as characterized by the Hamiltonian function H (q, p, r) reflect the competitive
process of individual pursuit of self economic interest in capitalist societies (descrip-
tive HDS) as well as planners' objective in command economies (optimal planning
models). The double axi-symmetry of HDS ensures that, in the absence of discount
(r), so long as no eigenvalues lie on the imaginary axis, the economy possesses a
Saddle Point equilibrium with the stable and unstable manifolds having exactly the
same dimensions. The introduction of a future discount rate (r), treated as the only
parameter, in the "perturbed" Hamiltonian system (PHDS) destroys its double axi-
symmetry and the conditions for the Saddle Point property to be maintained arise as
natural research questions. If at certain critical discount rate ro, a pair of eigenval-
ues hits the imaginary axis with nonzero speed, orbits are born: the economy starts
spinning and generates business cycles: the HDS undergoes a Hopf bifurcation (see
Chapter 9). Thus, not only local and global stability but also structural stability
can be fruitfully investigated in the framework of HDS. Other applications also have
similar economic meanings and interpretations specific to each problem have been
formulated.

8.5.2. Gradient (GDS) vsHamiltonian (HDS) Systems in

Economics

The role of GDS in Economics is more subtle, as has been noted above (see
examples 8.2, 8.3 and 8.4): it is seldom spelled out but it implicitly pervades eco-
nomic modelling. Both the Hamiltonian function which gives rise to the HDS and
the potential function which gives rise to GDS are economists' objective functions
and yet the HDS and GDS are vastly different mathematically, as has been noted:
one is of a symplectic form, the other is an inner product, a natural queStion is
"what is the relationship between them?" Perko (1991) has provided the answer: a
dynamic system is a HDS with n degrees of freedom iff the dynamic system which
is orthogonal to it is a GDS in R2n.
As an illustration, consider Goodwin's (1987) Leontiefinput-output model where
the net profit function II(q,p) = P'(I - A)q where q E R:' is the n-output vector and
pER:', its price vector, A = [aij] = input-output coefficient matrix with aij == 'if
=
178

minimum quantity of output i required to produce one unit of output j, 0 ~ a'i < 1,
a'i constant, (i,j = 1,2, ... , n). Thus profit 7r == p'q - p' Aq = total revenue less
total cost.
Writing grad 7r(p,q) as grad 7r(q,p) == (7rq ,7rp ) and spelling out market laws in
models I and II separately, we have, as in example 8.4 above,

Model I. P = -7r q = -(I - A')p: if price exceeds costs i.e. p > A'p, p will be
driven down by competition.
q = -7rp = -(I - A)q: if demand Aq exceeds supply q production q will be
increased.

Model II. P = -7rp = -(I - A)q: if demand Aq exceeds supply q, i.e. Aq> q price
will be driven up by competition.
q = 7rq = (I - A')p: if price exceeds costs i.e. p > A'p, profit maximizing firms
will step up production q.

Whereas II is a typical GDS, I is a "generalized" HDS and it can be seen that

they are orthogonal to each other. With subscripts I and II referring to model I and
II respectively, we have

«PlqI), (PIIqII)) = 7rql 7rJ'l -7rpl 7rq2, = 0

I.e.
p'(I - A)(/ - A')q - q'(/ - A)(/ - A')p = 0
= p'(/ - A)(/ - A')q - p'(I - A)(I - A')q = 0
(q'(I - A)(I - A')p being a scalar), i.e. the two systems are orthogonal to each other:
the trajectories of II cross the surface H(q,p) = h (some constant h) orthogonally.
It can be shown that I and II have the same critical points and at regular points,
their trajectories are orthogonal to each other. Centres of HDS correspond to nodes
of GDS but Saddle Points and Foci of HDS correspond to those of GDS (see Perko's
1991 for proof).

8.5.3. Economic Applications: Two-State-Variables

Optimal Economic Control Models

The PHDS with two degrees offreedom (n = 2) has been applied in Economics
under the headings of two-state-variable, or two-sector models, by Uzawa (1968)
in the context of optimal economic growth, Brock and Sheinkman (1977) in the
context of Stability, by Pitchford (1977) who raised some theoretical problems and
lately by Dockner (1985) whose important work has been applied to various eco-
nomic problems by Wirl (1991), Dockner, Feichtinger and Novak (1991) Dockner
and Feichtinger (1991) among others. In this section, we shall show how the double
symmetry and spectrum shifting analyzed in the last section could provide a simpler
 179

approach to the problem and bring about Dockner's results in a simpler way. For
further details, see Tu (1992).
Dockner's problem of minimizing

10'>0 e- 6t F(x,y,u)dt
subject to x= f(x,y,u), iJ = g(x,y,u) leads to the current valued Hamiltonian
function
H(x,y,)..,p) = max{F(·)
u
+ )..f(·) + pg(.)}
where (x,y) = state variables, ()..,p) = co-state variables, u = control variable and
S = discount rate, the only parameter under consideration. Pontryagin's Maximum
Principle (see Ch. 10) gives the HDS
x =H>.
iJ = HI-' (8.29)
~ = S)" - Hz

The linear HDS, obtained by linearizing the above system about the critical point
at which x = 0 = iJ = ~ = p. gives, as in (8.26)
z=M6z (8.30)

where z =(x,y,)..,p), and as before, in (8.27),

M6 = [~ -A'! H2 ]

= rCA ~, ] + ~ [ ~ J ] 2

=M6 + -14
•
2
S

h M• -
were 6 = [ CA" -.k
B ] =- [6
A - 2"
C
[2 B
_ (A' _ ~ [2) ] and = [ H#~
A _ H).~ H).~
H#~ ] .
,

B = [Z~~ Z~:] j c =- [Z:: Z::]· The characteristic equation c()..) for

(8.30) is
(8.31 )
where c; = sum of principal. minors of order i (i = 1,2,3, 4}, for example C4 =
det M6, Cl = tr M6 = +tr M6 + tr S/2(I4) = 0 + 2S since M6 being a Hamilto-
nian matrix, has zero trace, on account of the opposite signs of its diagonal terms:
tr M6 = tr A - tr A' = 0 (tr A = tr A'). Or simpler still,
M6 being Hamiltonian, tr M6 = L:~ Pi = 0 by Theorem (8.6). Tedious but straight-
forward computation of the remaining C2, C3 and C4 gives Dockner's Theorem 1
180

where K == C3 - 83 • This gives the explicit value of ~ in (8.28) i.e. the eigenvalue
quartet
8
~=-+",

-
2
where ",3 == (~r ~ ± ';K2 - 4c•.
We are now going to show how the double symmetry and spectrum shifting
(through 8/2) above can facilitate the solution and provide Dockner's results.
First, by shifting the spectrum of M6 through 8/2 to obtain the spectrum of M6,
it can be seen, from fig. 8.4, that the axis of symmetry (which was the original
imaginary axis) is shifted to the right by 8/2 and hence 8/2 is the new axis of
symmetry. This is Dockner's Corollary 1.
Also by spectrum shifting and bearing in mind at all times the double axi-
symmetry property of M6 , we have Dockner's Theorem 2, which says: if 8> 0, we
have either (i) "all Re (~) > 0", corresponding to our case of both eigenvalues pairs
lying inside the instability corridor;
or (ii) "three eigenvalues of M6 have a positive, and one has a negative, real part",
corresponding to our case where M6 has a pair of eigenvalues inside, and the other
pair, outside, the instability corridor, all four lying on the real axis, symmetrical
with respect to the imaginary axis;
or (iii) "two eigenvalues of M6 have positive, and the remaining two have negative,
real parts," corresponding to our case where the complex eigenvalues quartet lies
outside the instability corridor, and symmetric with respect to both axes.
and (iv) "no eigenvalue of M6 has real part zero". This follows from his proof in
which the equality signs (Dockner 1985 p. 101) are overlooked. It is easy to see
that if Re ",(== ±a) lies on the boundary of the instability corridor, i.e. ±a = 8/2,
then on shifting to the right through 8/2, two eigenvalues will land on the imaginary
axis, each on one side of the real axis. Thus is the onset of Hopf bifurcation. In fact
it is not difficult to show this by explicit computation. The double symmetry and
spectrum shifting approach saves us from such computations.
Finally, Dockner's results that" det M6 < 0 iff one eigenvalue is negative and the
remaining three are positive" can be seen by noting that det M6 = n~ ~; and the
alternative of one positive and three negative eigenvalues, which also gives det M6 <
0, is ruled out by the rightward, not leftward, shifting of the spectrum of M6 .
Thus the double symmetry and spectrum shifting approach, simple as it is, is
insightful and useful for this type of PHDS in Economics.
Dockner's model above has been used to investigate various economic prob-
lems involving PHDS with two degrees of freedom, such as the theory of rational
addiction (Wirl1991), complementarity over time (Dockner and Feichtinger 1991),
optimal saving and externalities (Wirl1991), population growth and Easterlin Cycles
(Feichtinger and Dockner 1990), production and marketing (Dockner, Feichtinger
and Novak (1991) and others. Space limitations do not allow us to treat readers
with the results obtained.
 181

8.6. Conclusion

In this chapter, we have discussed the CDS, LDS and HDS, their meaning,
derivation and some applications, in a simple manner. The CDS has not been
applied in Economics explicitly under this name, but economic behaviour clearly
indicates its presence underneath economic calculations and behaviour. The LDS
and especially the HDS are more familiar features in Economics, especially in the
context of Optimal Economic Control which will be briefly examined in Ch. 10.
The dynamics of these systems could be quite complex when some key parameter
reaches some critical level which causes the system to lose its stability. This is the
subject matter of the next Chapter where Bifurcation Theory, Catastrophe Theory
and Chaos will be introduced.
Chapter 9

Simplifying Dynamical Systems

9.1. Introduction

Dynarcical Systems can be very complicated. The number of equations, the

variables concerned and their interaction with one another may be so intricate as
to defy attempts at solution unless ways and means can be found to simplify them.
Simplification not only saves effort but also provides intuition. The best known
approaches can be grouped under two main headings: reduction of dimensionality
and elimination of nonlinearity. In this chapter, we shall briefly review some major
ones, starting with the Poincare map, Floquet theory and proceeding to the Central
Manifold theorems, normal forms, elimination of passive coordinates and finally
Liapunov-Schmidt reduction. Although these theories are, by nature, advanced,
the discussion will be kept at an elementary level.

9.2. Poincare Map

Poincare Map is designed to study a transversal (roughly speaking, non-tangent)

cross-section ~ of a periodic orbit I of a flow CPt of x = f(x), x ERn, instead of
analysing the full n-dimensional dynamic system: the succession of points of return
of I to ~ is simpler to study and provides just as much information. For example
the stability of x of the map P(x) corresponds to the stability of the flow CPt: if
CPt is hyperbolic with n. (nu) eigenvalues with negative (positive) real part, then
the linearized map DP(x) has n. (nu) eigenvalues with modulus less (greater) than
1. Thus the flow CPt generated by the vector field x = Ax has given rise to a map
X 1-+ P(x). This is the extension of the transversal line of fig. 7.15 in Chapter 7 to
the multi-dimensional case.
The major steps consist of choosing the cross-sectional map ~ and analysing the
evolution of its points of first return. More specifically, consider the system

(9.1 )

Suppose the flow CPt generated by (9.1) is T-periodic, i.e. cp(t + T, xo) = cp(t, xo) and
the cross-sectional map ~ of dimension n - 1, transversal to the vector field, the
Poincare map P(x) : V C ~ - t ~ associates point x in V with its point P(x) of first
184

return to E (see fig. 9.1).

(a) (b)

Figure 9.1. Poincare Map

The point Xo which P(x) maps to itself, i.e. P(xo) = Xo is the fixed point. The global
stable W;lb) and unstable W~('Y) manifolds as well as their local stable W-b) and
unstable W"b) can be visualized geometrically as well as their periodic orbit 'Y (see
fig.9.1b).
=
W;I('Y) U<p,(W-(xo))
t

W;'b) =U(MW" (xo))

t

Example 9.1.
x = -y + x(1 - x 2 _ y2)
(9.2)
iJ = x + y(1 - x 2 _ y2).
In polar coordinates (putting x = r cosO, y = r sinB x 2+y2 = r2(cos2 B+sin2 B) = r2
and differentiating 2rr = 2xx + 2yiJ and substituting, etc. (see Chapter 5, section
5.7), (9.2) is
r = r(1 - r2 ), r(O) = ro
(9.3)
(B) = 1, B(O) = Bo.
The solution, obtained by separable variables or Bernouilli equation (see Ch. 2,
section 2.1.3), is

Let T = 211" be the time of first return to E of the orbit t/>t(x) based at x, then the
Poincare map P(x) = t/>T(X) in our example is

(9.5)
 185

At ro = 1 where r = 0 in (9.3), the stability of the map obtained by differentiating

P at TO = 1, is

DP{I) == - dP- = e-47rro3 [ 1 +( "21 -1 ) e- 47r] -3/2

drl ro =l ro
= e- 47r < 1 at TO = 1.

Thus the point x with ro = 1 is a stable fixed point and 'Y is a stable closed orbit.

Poincare map has also been extended to homo clinic orbits to study structural
stability, Melnikov function, suspension of diffeomorphism, and discrete systems in
general. These, however, will not be discussed. For details, see Arrowsmith and
Place (1990) or Wiggins (1990):

9.3. Floquet Theory

Floquet theory provides a device of reducing dynamical systems involving peri-

odic coefficients to a constant linear system which is much simpler to solve

Theorem 9.1. (Floquet.) Each fundamental matrix <I>{t) of the T-periodic sys-
tem
:i; = A{t)x, x{O) = xo (9.6)
where A{t) = A{t + T), T fixed, and x E Rn can be written as
<I>{t) = P{t)e Bt (9.7)
where P{t) is T -periodic, i.e. P{t) = P{t + T) and B is a constant n X n matrix.

Proof. If <I>(t) is a nonsingular fundamental matrix of (9.6), then so is <I>(t + T).

But these are linearly dependent, i.e. there exists some nonsingular n x n matrix C
such that
<I>(t + T) = <I>{t)C. (9.8)
Since T is fixed, there exists some constant matrix B such that

(9.9)

It is easy to show that the fundamental matrix is T-periodic, i.e. <I>(t) = <I>(t + T).
Let <I>{t)e- Bt == P{t).

P{t + T) == <I>(t + T)e-B(t+T)

= <I>(t)Ce- BT e- Bt by (9.9)
= <I>(t)eBT e- BT e- Bt by definition
= <I>(t)e- Bt
== P(t). (QED)
186

Definition 9.1. C in (9.9) is called the monodromy matrix of (9.6). Its eigenvalues
p are called characteristic multipliers and A such that
P= e>.T (9.10)
is called characteristic or Floquet exponent. Let A be chosen such that they coincide
with the eigenvalues of B, i.e. (B - M)u = 0 and (C - pI) v = 0, u ::J 0 ::J v. C = eBT
in (9.9) gives (in canonical form V-I BV = diag(Pi) and T-ICT = diag(Ai) assuming
Band C are both simple matrices)

(9.10)'

Note that the fundamental matrix (9.7) is a product of a periodic matrix P(t) =
P( t + T) and eBt . This leads to the following Corollary.
Corollary 9.2. The periodic system:i; = A(t)x in {9.6} is equivalent to the con-
stant coefficient system
i; = By (9.11)
Proof. Using the transformation x = P(t)y, we have
:i; = Py + Pi; = A(t)P(t)y
i; = P-I(AP - p)y. (9.12)
Differentiating P(t) = 4.>(t)e- Bt in (9.7) gives
P= <Pe- Bt - 4.>e- Bt B
= AP-PB (9.13)
since <P = A(t)4.> by definition and
<Pe- Bt == 'A(t) 4.> (t)e- Bt = AP.
Substitution gives
i; = P-I(AP - AP + PB)y
= By (QED) (9.11)
Thus Floquet theory brings about an important simplification. Solving system (9.6)
amounts to solving (9.11) which is much easier. It can be seen that a necessary and
sufficient condition for asymptotic stability is that characteristic exponents Ai have
negative real part, or equivalently Pi have modulus less than 1. '
Theorem 9.3.
det C = IT Pi = ef tr A dt (9.14)
i

n
tr B = ~ Ai =
1 (T
T 10
(21Ti)
tr A dt mod T (9.15)
 187

Proof. Let ~(t) be a fundamental matrix of x = A(t)x in (9.6) with ~(O) = I by

an appropriate choice of units. From (9.7) det ~(t) = det[P(t)e Bt ]. But det ~(t) is
the Wronskian w, which is ef; tr AdT and

(9.16)

and the results follow from the definitions of characteristic multiplier and
exponents. (QED).

Remark 9.1. w = ef;tr AdT is well known (see for example, Grimshaw (1990), p.
28). This could be derived very simply by differentiating ~~ == ft(det ~(t)) using
property P.8 of determinants in Chapter 4 and substituting <i> = A~. This gives tV =
r(t)w whose solution is w(t) = woef;T(S)ds where r(t) = tr A and w(t) = det~(t).

Remark 9.2. From the linearization in a neighbourhood of a periodic solution, one

of the solutions of the linear system is <i>(t) which implies that one characteristic
exponent, say AI, is zero and hence the corresponding characteristic multiplier PI
is one. Stability depends on the remaining Ai and Pi (i = 2,3, ... , n). Asymptotic
stability obtains when Re Ai < 0 and IPil < 1 for i = 2,3, ... , n.

9.4. Centre Manifold Theorem (CMT)

The CMT plays an important part in reducing the dimension of a DS having

non-hyperbolic critical points, by restricting its topological behaviour to its centre
manifold. This could be considered to be a generalization of the Hartman-Grobman
Theorem (Theorms 7.3 and 7.4). It will be recalled that this says essentially that
so long as the critical point x is hyperbolic, i.e. the system has no eigenvalues with
zero real parts at x, then both the nonlinear system :i; = f (x) : U c Rn --+ Rn
and its linearization ~ = D f(x)~ are topologically equivalent in that both have the
same number of stable (ns) and unstable (nu) eigenvalues where ns and nu are,
respectively, the number of eigenvalues lying respectively in the open left and right
half of the complex plane. No eigenvalues lie on the imaginary axis, i.e. at x,
s + u = nand Rn = ES EB EU where ES and EU are respectively the eigenspaces
spanned by ns and nu. ES and EU may be considered as the tangent subspaces of
the nonlinear local stable WS(x) and unstable WU(xl manifolds at x (see fig. 9.2).
Geometrically, the Hartman-Grobman theorem says that so long as the critical point
x is hyperbolic, and the manifolds WS, WU at x are smooth enough, then at the
point of tangency between ES and WS(x), EU and WU(x) at x, both :i; = f(x) and
188

e= D f(x)~ exhibit the same local topological behaviour. More precisely

Xz

E'
----===--::+........::;:::::---_.,

Figure 9.2. Linear eigenspaces and nonlinear manifolds

Theorem 9.3. (Hartman-Grohman). If x = f(x) : U c Rn -+ Rn has a

hyperbolic fixed point X, then locally, there exist smooth stable W·(x) and unstable
WU(x) manifolds tangent to the linear spaces E· and EU where locally both the
e
nonlinear system x = f(x) and its linearization = D f(x)~ have n. and nu of the
same dimensions.

~;:....- _ _ w·

Figure 9.3. The stable, unstable and centre manifolds

The Centre Manifold Theorem (CMT) extends this to the non-hyperbolic cases
in which some eigenvalues are zero (or have zero real parts) i.e. the spectrum of A
where A = D f(x) is split into u., Uu and U c (s + u +c = n) with their corresponding
eigenspaces E·, EU and EC (Rn = E6 $ EU $ EC), where uC is the number of "central"
eigenvalues i.e. those which lie on the imaginary axis and EC the central eigenspace
spanned by U c (see fig. 9.3). The CMT reduces the investigation of the dynamic
 189

system to the dynamics of the centre manifold WC(x) at its point of tangency with
EC.

Theorem 9.4. Let x = I(x) : U c Rn -+ Rn be a C r vector field vanishing at

the origin i.e. 1(0) = 0 and A = D 1(0) whose spectrum O"(A) = {O"II' O"U. ue:} where
s + u + c = n, with their corresponding eigenspaces Ell, EU and Ee:. Then there exist
C r stable, unstable manilolds WII, W· and a C r - 1 centml manilold we: tangent to
Ell, EU and Ee at 0 and invariant lor the flow 01 I.

Proof. Carr (1981). Marsden and McCracken (1976), Guckenheimer and Holmes
(1986).

Example 9.2. (Kelly 1961).

(9.17)
iJ =-y
A(O,O) = [~ ~1]' ~ = (0, -1): the system moves to the origin along the y-axis
but from left to right > 0) along the x-axis: Ell = W· = the y-axis which is
(x 2
the stable eigenvector VII corresponding to ~II = -1 and the central manifold we: is
tangent to Ee, which is Ve associated with ~e = 0, the x-axis itself. See fig. 9.4.

--~~--~~~----~ __----x

I
Figure 9.4. The Central Manifold

For the general case, consider the system

x = Ax + I(x,y)
(9.18)
iI = By + g(x, y)
where x ERn, y E Rm, 1(0) = 0 = 1'(0); g(O) = 0 = g'(0) where 1'(0) == DI(O)
g'(0) == Dg(O), A is an n x n "central" matrix (i.e. with eigenvalues lying on the
imaginary axis), B is an m x m stable matrix (i.e. with eigenvalues having negative
real part). Assume for simplicity, the absence of Wu. Since the centre manifold we
goes through the origin (i.e. h(O) = 0) where it is tangent (i.e. h'(O) = 0) to ~ (i.e.
the x-axis where y = 0, see fig 9.3 and 9.4), it can be represented as

we = {x, y I y = h(x), h(O) = 0 = h'(O)}. (9.19)

190

With h(x) substituted into (9.18), the flow on we is governed by the reduced
n-dimensional system
x = Ax + J[x, h(x)] (9.20)
Carr's (1981) first theorem asserts that the full system (9.18) and the reduced system
(9.20) are equivalent: if one is stable, so is the other, and vice versa. Since (9.20)
contains all the informtion needed, it alone need be investigated. This constitutes a
considerable reduction of dimensions.

To compute h(x), note that h(O) = 0 = h'(O) implies that h(x) must have neither
a constant nor a linear term i.e. its Taylor expansion must start with quadratic and
higher order terms, h(x) = o:x 2 + f3x 3 + .... Substituting h(x) into (9.18) gives

h'(x)[Ax + f(x,h(x»] = Bh(x) + g(x,h(x» (9.21 )

(9.21) with the "initial conditions" h(O) = 0 = h'(O) must be solved for the centre
manifold. But this is a formidable task, so that we must be approximated by study-
ing some neighbouring functions ¢ : Rn -t Rm which are C l in the neighbourhood
of the origin.

M[¢(x)] = ¢'(x)[Ax + f(x,¢(x»]- B¢(x) - g[x,¢(x)] (9.22)

and Carr's (1981) Theorem 3 asserts that h(x) and ¢(x) are "close" to each other.
More precisely,

Theorem 9.6. Carr (1981). Let ¢ be a C l mapping of the neighbourhood of the

origin in Rn into Rm with ¢(O) = 0 = ¢'(o). If M[¢(x)] = O(lxl q ) as x -t 0 for
some q > 1, then limx-+o Ih(x) - ¢(x)1 = O(lxl q ).

Proof. Carr (1981), Theorem 3. Note that we have written /,(0) and ¢'(O) for
D f(O) and D¢(O) to indicate the Jacobian of f(O) and ¢(O) at x = 0, to simplify
notations unless confusion arises.

Example 9.3. Carr (1981). Consider the system

x = xy + ax2 + by2 x
(9.23)
iJ = -y + cx 2 + dx 2y
the center manifold h(x) can be approximated by

M[¢(x)] = ¢'(x)[x¢(x) + ax 3 + bx¢2(X)] + ¢(x) - cx 2 - dx 2 ¢(x).

Since h(O) = 0 = h'(O), we can try h(x) = o:x2 + f3x 3 + ... , differentiate it,
substituting into the above gives

LHS = (2o:x + 3f3x 2 )[(O:X 3 + f3x4) + ax 3 + bx(o:x 2 + f3x 3 )]

= -o:x2 - f3x 3 + cx 2 + dx 2 (o:x 2 + f3x 3 ) = RHS.
 191

°
Equating the coefficients of equal powers of x on both sides, will give, after some
calculations, a = c, (J = so that h(x) = cx 2 + 0(lxI 4 ). Substitution into (9.23)
gives

± = cx3 + ax 3 + bc2x 5
= (a + c)x 3 + 0(x 5 )

which shows that at (0,0), (9.23) is stable if a + c < 0, unstable if a + c > 0. If

°
a+c = 0, higher order terms must be computed, which give ± = (cd+bc2)x 5 +O(x7 )
which is stable if cd + bc2 < and unstable if cd +" bc2 > 0. Carr also showed that the
CMT carry over to maps (Carr (1981), p. 35). Finally note that Carr has warned
us that while WS and WU are unique, we is not.
Thus, it can be seen that the CMT provides an important simplification by
reducing dimensions.

9.5. Normal Forms

Another method for simplifying nonlinear DS ± = f(x) is to reduce them to their

"normal form" , which is much simpler to handle. Ideally we aim at using coordinate
changes to bring ± = f(x) to iJ = Ay, where A is some constant matrix, and solve
for y = eAt Yo (see Chapter 5). But this is not easy. We shall see why. Consider the
system

± = f(x)
= Ax + fr(x) (r 2: 2)(Taylor expansion) (9.24)

where A = D f (x), f m (x) = monomials of the form xm == X;"l x2'2 ... x;:''' with
Em; = m, and fr(x) == h(x) + fa(x) + .... Clearly fm(>'x) = .Am f(x) i.e. fm(x) is
a homogeneous function of degree m.
If (9.24) could be brought to the form iJ = Jy where J is the Jordan form
(see Chapter 5), we are done. Unfortunatley this is almost too much to expect:
the reduction of (9.24) almost always involves monomials (such as xlx~, a,(J 2: 1)
which could not be removed by coordinate changes, and the Taylor expansion will
be of the form
(9.25)
where hr(y) E Hr, the space of homogeneous polynomials of degree r (r ~ 2), for
example hm(y) = y;"lY2'2 ",y;:''', with Em; = m, m 2: 2.
The procedure is to use the near-identity transformation

x=y+hr(y), (hrEHr, r2:2) (9.26)

where hr(y) = h2(y) + h3(y) + ....

192

Differentiation gives, remembering that x = Ax = A(y + hr(y)),

iJ = x - Dhr(x)x = [I - Dhr(x)]x
~ [I - Dhr(y)]A[y + hr(y)]
= Ay - [Dhr(y)Ay - Ahr(y)] + O(yr+l) (9.27)
= Ay + o(yr+1) if Dhr(y)Ay = Ahr(y).
It can be shown that the condition Dhr(y)Ay = Ahr(y) requires that the Lie bracket
in (9.27) is nonsingular, which would be the case if Ai = ~i mjAj where (AI, ... ,An)
are the eigenvalues of A, assumed distinct, i.e. ifthe n eigenvalues of A are resonant.
(For details, see for example Arrowsmith and Place (1990) or Guckenheimer and
Holmes (1986)).
The above discussion can be summarized as follows:
Theorem 9.7. (Poincare.) If the eigenvalues of the matrix A are nonresonant,
x = Ax + fr(x) (r 2:: 2) in {9.24} can be transformed into iJ = Ay by the transforma-
tion x = y + hr(y) (r 2:: 2) of {9.26}. If there is no resonance for m = 2,3, ... , r - 1
but resonance for m = r then all terms of degree 2,3, ... up to r -1 can be removed
by the above coordinate changes, but the resonant terms of degree r remain, and we
are left with a nonlinear equation in y with resonant terms only. This is the process
of normalization.
The simplification provided by normalization is obvious.

9.6. Elimination of Passive Coordinates

Thompson and Hunt (1973) introduced the simplification of DS by eliminating

"passive" coordinates, leaving only "active" ones. This does not merely consist of
truncating the Taylor expansion of some potential function (or objective function in
Economics such as profit to be maximized or cost to be minimized), but offorming a
new potential function. Passive coordinates refer to those variables in the Morse set
(see Chapter 10) or the good set, which are well behaved and active coordinates refer
to those variables in the degenerate set, to agents provocateurs which give trouble.
Let some potential function V(x, fL) : Rn+r -+ R, V E C k (k 2:: 2), where
x E Rn and parameter fL ERr. Let V be degenerate with Hessian A of rank n - m
and corank m, split into passive AP of rank n - m and active Aa of rank 0 with
x == (xP,x a) where x P == (Xl,X2, ... ,X n- m ), x a == (x n- m +1, ... ,xn ). Since AP is
nonsingular by assumption, using the Implicit Function Theorem, we can express
the passive coordinates in the parametric form
x P = xp(xa, fL)
and substitute them into the potential function which would then be a function of
active variables alone, i.e.
V(X,fL) = V(Xp,Xa,fL) = V[XP(Xa,fL),Xa,fL]
== W(Xa,fL)·
 193

In practice, the number of active variables is usually very small. Writing active
variables x a as y to avoid superscripts, i.e. x a == (Xn-m+h . .. ,xn) == (Yh Y2, ... ,Ym)
and taking m = 1 for simplicity of exposition, i.e. x a = y, Taylor expansion of W
gives
W(xa,J.t) == W(y,J.t) = 0 + 0 + 0 + 0 + ay4 + by2 + cy + H.O.T.
h
were - I B2 W
a = 4f By. etc ....
The gradient dynamic system (see Chapter 8) is now
:i; = -grad W(xa, J.t).

Thus, by eliminating the n - m passive variables and focusing on the remaining

m active variables (m is usually small) this approach simplifies the DS considerably
and is useful in the context of Catastrophe theory in Chapter 10.

9.7. Liapunov-Schmidt Reduction

This method consists of reducing the non-hyperbolic critical point of a DS of n

equations in n unknown (x) and r + 1 parameters J.t (for simplicity, let r = 0)
(a) :i; = f(x,J.t) : R n +1 ~ R n (9.28a)
to
(b) g(x, J.t) = 0 : R x R ~ R (9.28b)
which reduces the technicalities to the minimum. This is particularly useful in the
study of Bifurcation theory.
Let Df(x) = A and ker A = Xl be of dimension 1, Range R(A) = Yi. The
reduced equations are obtained by choosing vector space complements X 2 and Y2 of
ker A and R(A) (see section 4.9 chapter 4) i.e.

R n = ker A E9 X 2 == Xl E9 X 2
R n = R(A) E9 Y2 == YI E9 Y2 •
Note that dimXI = 1 = dimY2 ¢:}rankA = n -1 and dimYI = n -1 = dimX2
(see Chapter 4). Let P be the projection of Rn onto R(A) i.e. P: Rn ~ YI with
ker P = Y2 and Range R(I -A) = Y2 and ker(I -A) = YI . Thus Df(x) is Fredholm
i.e. of dim Xl < 00, dimYI < 00. Suppose (xo,J.to) = (0,0). Clearly for any u ERn,
U = 0 iff Pu = 0 and (I - P)u = o. Thus

(a) P f(x, J.t) = 0

(9.29)
(b) (I - P)f(x, J.t) = o.
(a) may be solved for the n -1 variables x and the solution substituted into (b) and
solved for the remaining unknown. Because of the decomposition Rn = Xl E9 X 2 ,
we may split x into Xl + X2 and obtain form (a)
(9.30)
194

l.e. (9.30) defines a map F : Xl x X 2 X R -+ YI = R(A) where

F(XI,X2,/1-) == Pf(XI,X2,/1-).

Solving (9.29a) by the Implicit Function Theorem gives a unique X2(XI,/1-) with
X2(0,0) = O. Substituting into (9.29) gives

Then Xl + X2(XI, /1-) is a solution of f(x, /1-) = 0 in (9.28a) iff

which is obtained by substituting X2(XI, /1-) into (9.29b). Thus f(x, /1-) = 0 iff f[Xl +
X2(Xl, /1-), /1-] = o.
The reduced equation f(x, /1-) : R x R -+ R has all the information needed
and thus the n-dimensional DS has been reduced to the equivalent one-dimensional
equation which represents the utmost simplicity. This is the result of a clever use
of the Implicit Function Theorem in a situation where it appears, at first sight, to
fail i.e. where the critical point of the DS is non-hyperbolic.

9.8. Economic Applications and Conclusions

It can be seen that the various simplification techniques discussed in this chapter
are very powerful indeed. However, their application would require the equations
of the DS to be given in explicit form, which would seldom be the case, especially
in pure Economics, and hence the discussion of these various approaches may seem
to have little economic relevance. It is true that, except in advanced theoretical
Economics papers, these tools are not widely known among Economics students
and their application is not widespread, or at least not yet. However, it is precisely
for this reason that Economics students should be exposed to them and have them
in their tool box, in view of their importance and usefulness.
On further reflection, however, the simplification methods discussed in this chap-
ter have actually been implicit in Economics reasoning and model building. They
provide a logical foundation and justification for reducing economic systems in-
volving thousands and thousands of variables to just one, two or three dimensions
where figures a small number of essential economic variables. The ceteris paribus
assumptions made to justify these reductions can now be implicitly based on these
simplification theories. Indeed, there is no need to know the precise and explicit
forms of each function in the DS: so long as we are aware that, theoretically at least,
these complicated models can be simplified, and furthermore their reduced forms
are topologically equivalent to the full models and could be brought to the various
standard reduced forms provided by each one of the above approaches, then valid
conclusions can be drawn from qualitative economic analysis where equations are
brought into the standard forms of the various approaches discussed in this chapter.
Chapter 10
Bifurcation, Chaos and Catastrophes
in Dynamical Systems

10.1. Introduction

Consider the dynamical system (DS)

x= f(x, J-l) == fJJ(x) (10.1)

where x E Rn is a vector of n state or internal variables and J-l E Rr is a vector of r

parameters, f(x,J-l) : Rn X Rr -+ Rn or fJJ(x) : Rn -+ Rn are assumed to be smooth.
The DS (10.1) depends continuously on J-l: starting from the same initial conditions,
the flow follows a different path for each set of parameters, and to emphasize this
fact, (10.1) is written as x = fJJ(x) : Rn -+ Rn to indicate an r-parameter-family
of real differentiable functions on Rn. A variation of J-l causes a change in the
DS. These changes are mild in some cases, abrupt in some others, or worse still
a loss of structural stability leading to chaotic and erratic flows which do not fit
any conventional types, can result from some infinitesimally small and seemingly
innocuous variations of some parameter. These are covered under the headings of
Bifurcation Theory, Catastrophe Theory and Chaos which will be briefly introduced
in this chapter. A common thread running through these fields is the presence
of singularities which causes a failure of the Implicit Function theorem (1FT) and
destroys the structural stability of the DS, invalidates forecasts and undermines
Comparative Statics analysis. One major problem encountered here is the large
number of mathematical tools needed and their advanced nature. We shall present
a plain, non technical, account of these theories, emphasizing concepts, meanings
and applicability rather than formal definitions and proofs.

10.2. Bifurcation Theory (BT)

B.T. refers to the branching of solutions at some critical value J-lo of parameter
J-l, causing a loss of structural stability.
B.T. goes back to Euler's buckling of columns in the 1870's but the most
explicit results are perhaps presented by Poincare (1885). Poincare investigating
the equilibrium of a system f(x,J-l) : Rn+l -+ Rn obtained by solving 8f!8.7:i = 0
giving xi = xi(J-l) (i = 1,2, ... , n) which he called series lineaires des racines (1952
p. 43) has shown that the necessary and sufficient conditions for two or more roots
to coincide are that Hf(x*), the Hessian of f at x = x*, vanishes (1952 p. 43-44).
196

As JL varies, if the DS is stable for JL < JLo, unstable for JL > JLo, then at JLo, there
exists an exchange of stability and bifurcation is said to take place. For periodic
solutions of (10.1) where x(t) = x(t + T) of period T, Poincare has shown that if
two periodic solutions approach each other and merge, at some JLo, then there exists
an exchange of stability. In the case of complex roots, he noted that when a pair of
eigenvalues )"(JL) crosses the imaginary axis at JL = JLo, i.e. Re )..(JLo) = 0 then there
is an exchange of stability. These findings, amazing for the 1880's, have inspired
Andronov et al. in the 1930's, Hopf in the 1940's and a large number of researchers
in the last 20 years.
We shall briefly outline B.T. restricting ourselves to the simplest codimension
one B.T. where only one parameter JL E R is involved, in the one, two and higher
dimensional DS. Consider System (10.1). If II: == [*]= D",f(x,JL) is nonsingular,
then by the 1FT, x* = x*(JL) is an equilibrium of (10.1) which varies continuously
with JL, i.e.
f[x*(JL),JL] = 0 (10.2)
and we have, by the Linearization theory (see Ch. 7),

(10.3)

where A(JL) = D",f[x*(JL),JL] = Jacobian of fat x*(JL) and z == x - x*.

All this is familiar material (see Ch. 7) except that in this chapter, we emphasize
the parameter dependence of (10.1), its linearized matrix A(JL) and its eigenstruc-
ture. Assuming (10.1) is analytic in x and JL and A(JL) is nonsingular, we have
c()..) = det[A(JL) - )"(JL)I] = 0 and )..i = )..i(JL) for all i. As JL varies, if the real part
Re )..i(JL) of some eigenvalue changes from negative to positive or vice versa, crossing
the imaginary axis at JL = JLo, then there is exchange of stability and bifurcation
takes place. The crossing is on the real line for real eigenvalues and off the real line
for pairs of complex eigenvalues. Examples of the first type are the Saddle Node
(SN), Pitchfork and Transcritical and of the second type are Hopf Bifurcation (see
fig. 10.1)

ImA 1m A

--.-~~~--------ReA --------~--------ReA
o

(a) Real eigenvalues (b) Complex eigenvalues

Figure 10.1. Bifurcation

 197

10.2.1. One Dimensional Bifurcations

Consider the D.S.

:i; = l(x,JL) = IIl(x) (10.4)
where I : R2 -t R (or III R -t R) is smooth. Let x*(JL) be an equilibrium or
critical point of (10.4) at which :i; = 0, i.e.

l[x*(JL),JLl = O. (10.5)

This is a particular case where A(JL) in (10.3) is an (1 x 1) matrix whose eigenvalue

A(JL) = /:,,(= of/ax), and (10.4) is stable if A(JL) < 0, unstable if A(JL > 0, and
undergoes a bifurcation at JLo if A(JLo) = O. Differentiation of (10.5) gives
dx
Ix dJL + III = 0 (10.6)

A(JL) = Ix(x*, JL) = -Ill ~~ . (10.7)

Assuming III i- 0, A(JLo) = 0 implies ~ddl

x "0
= 0 i.e. the slope of x(JL) is vertical at
JL = JLo·

Example 10.1. Saddle-Node Bifurcation.

The critical point defined by I = 0 is x 2 = JL

< 0 for x> 0

A(JL) = Ix = -2x { > 0 x<O
=0 x = O.

Thus the origin where I(x, JL) = 0 = Ix i.e. (x, JL) = (0,0) is the bifurcation point
where the stable (8) and unstable (u) arms coalesce, resulting in an exchange of
stability (see fig. 10.2). This is called Saddle Node Bifurcation.

Example 10.2. Transcritical Bifurcation.

The critical point is x* = (0, JL) obtained by solving I = O. The solution consists
of two branches xi = 0 i.e. the horizontal axis and x 2 = JL, the 45°-line (see fig.
10.2) '/(x,JL) = 0 and A = Ix = JL - 2x = 0 imply that the origin (x,JL) = (0,0)
is the bifurcation point where 2 branches intersect and exchange stability xi = 0
for all JL with Al = JL - 2x = JL - 0 is stable on the left and unstable on the right,
of the vertical axis and xi = JL branch with A2 (JL) = JL - 2x = -JL (for x = JL) is
unstable on the left and stable on the right of the vertical axis. This is a transcritical
bifurcation.
198

Example 10.3. Supercritical pitchfork.

The critical points are x = (0, ±,fii) and stability depends on Ix i.e.

Al = Ix = J-L - 3x 2 = J-L for branch 1 where x = 0

A2 = Ix = J-L - 3J-L = -2J-L < 0 for J-L > 0 for branch 2.
Thus the origin is a bifurcation point at which 2 branches with opposite stability
meet and exchange stability (see fig. 10.2). This is called supercritical pitchfork.

Example 10.4. Subcritical pitchfork.

This is the same as the supercritical pitchfork with _x3 instead of +x 3• The result
is the fork turns into the opposite direction and is unstable (see fig. 10.2).

x x

(8)

(8)
. 11

...
--------~-------Il

-" -(u)
.
•• (u)

(a) Saddle Node: ± = J-L - x 2 (b) Transcritical ± = x(J-L - x)

x x

(u)
'-,
9
(u)'

(c) Supercritical pitchfork (d) Subcritical pitchfork

± = J-LX - x3 ±=J-Lx+x3

Figure 10.2. Bifurcation examples

 199

The above discussion and illustrations can be summarized in a Theorem where,

without loss of generality, the bifurcation point is set at the origin where (x, J-L) =
(0,0).

Theorem 10.1. Let f(x, J-L) R2 ~ R be a smooth mapping and

(i) f(O, J-L) = 0 for all J-L
(ii) fx(O, 0) = 0
(iii) fXjJ (0,0) #- 0
then (x*, J-L*) = (0,0) is a bifurcation point and the set of solutions of f(x, J-L) consists
of two crossing curves.

Proof. This is a simplified version of a well known bifurcation theorem whose proof
can be found, at various levels of difficulty, in Marsden (1978), Abraham and Mars-
den (1978), Arnold (1972), Crandall and Rabinowitz (1971) or Nirenberg (1974).
The Theorem is easy to understand and apply:
(i) is the equilibrium condition, whether f is a vector field, or a first order condition
of some maximization or minimization problem, i.e. f = 8F(u, x)8x = 0 for some
potential function F. Note that (i) implies fjJ(O, J-L) = 0 = fjJjJ(O, J-L) for all J-L.
(ii) indicates the failure of the 1FT i.e. fx(O,O) = >"(J-L) = 0 and
(iii) means that the eigenvalue must cross the origin at nonzero speed i.e. fXjJ =
::k = d~~) #- O. It is easy to verify that all these conditions are satisfied by the
transcritical x = J-LX - x2 and pitchfork x = J-LX ± x3 bifurcations, but not for the
saddle node x = J-L - x2 (where fXjJ = 0) which does not have two crossing curves.

For the general case x= f(x,J-L) : Rn x R ~ Rn we have

Theorem 10.la. Given f : Rn x R Rn suppose at (0, Ilo),

~

(i) fx(x, Il) has rank n - 1 (where fx = Jacobian of f)

(ii) f(O, Il) == 0 for allil
(iii) fx . Xl = 0 for Xl #- 0
f;Y2 = 0 for Y2 #- 0
(fjJx . Xl, Y2) #- O.
Then (O,llo) is a bifurcation of f. In fact the set of solutions of f(X,ll) near the
origin consists of two curves intersecting only at the origin.

Proof. See example Nirenberg (1974) or Marsden (1978).

Example 10.5. f(x, y, Il) = [y, -llx(l - x 2)]

fx(== Dxf(x, y, Il) = [ ~Il + 31lX2 ~]

fx(O, 0, 0) = [~ ~],
200

satisfying (i), being of rank 1 I(O,p.) == 0 for all p., satisfying (ii)

Ix(O, 0, O)Xl = [~ ~] [ ~ ] = [ ~ ]
1;(0, 0, 0)Y2 = [~ ~] [ ~ ] = [ ~]
(i.e. Xl = ker Ix, Yi = Range Ix, X = Xl EB X 2 , Y = Yi EB 12 where I: is the
conjugate transpose of Ix)'

8 21 )
I/1x ( == 8p.8x =
[0-1 0]
0

(J/1x' Xt,Y2) = «0,-1),(0,1)) = -1:1 0

satisfying (iii). Hence by Theorem (10.la), there is a bifurcation at (0, p.o), i.e. there
is another branch and the solution is
(i) Y = 0, x = 0 for any p. (see fig. 10.3).
(ii) Y = 0, P. = 0 for any x (see fig. 10.3).

(x, y)

case (i) case (ii)

Figure 10.3. Bifurcation of I(x, y, p.)

10.2.2. Hopf Bifurcation

Hopf Bifurcation arises when one pair of complex eigenvalues crosses the imag-
inary axis at nonzero speed. Suppose initially all eigenvalues of the linearized part
A(p.) = DxI(x,p.) of·x = I(x,p.) : Rn+1 --+ ~ lie in the open half left plane
and as p. varies, one and only one pair A(P.) = a(p.) ± if3(p.) (dropping subscripts
to alleviate notation) crosses the imaginary axis at p. = p'o, at nonzero speed, i.e.
a(p.o) = 0 :I da(p.o)/dp. and f3 :I 0, then near P.o, the equilibrium bifurcates into a
 201

Limit cycle. By convention, the crossing is from the left i.e. da(p,o)Jdp, > 0 (See fig.
10.1.)
Intuitively, this can be seen by writing this subsystem in Jordan normal form
(see Ch. 5, eqs 5.19 and 5.20) as

X= J(p,)x (10.8)

where J(p,) == [a(Ji) -f3(Ji)]. J(P,o) = [ 0 -f3(Jio) ]. Clearly this is a

f3(Ji) a(Ji) , f3(Jio) 0
hyperbolic stable focus for a(p,t} < 0 unstable focus for a(P,2) > 0 and a centre
for a(p,o) = 0(P,1 < P,o < P,2).
In normal form, the Hopf Bifurcation can be written as (See Hassard and Wan
(1981), Marsden and McCracken (1976))
x= J(P,o)x + higher order terms (H.O.T.) (10.9)

or in full

where /3 = Jdet J(p'o) and a, b E R, involving third order derivatives in the Taylor
expansion. In polar coordinates, this is

r = a(p,)r + a(p,)r3 + 0(r 5 )

B= /3(p,) + b(p,)r2 + 0(r4) (10.11)

whose Taylor expansion about p, = P,o (= 0 for convenience, i.e. a(O) = 0 # /3(0))
gives

r = a' (O)p,r + a(0)r3 + 0(p,2r, p,r3, r5 )

B= /3(0) + /3' (O)p, + b(0)r2 + 0(/12 , p,r2, r4) (10.12)

where 0:'(0) == dlJt:=o.Similarly /3'(0). Neglecting higher order terms in (10.12) and
writing a(O) = a, /3(0) = /3, b(O) = b, /3'(0) == c and a'(O) == d for simplicity, (10.12)
is

r = dp,r + ar3
iJ = /3 + cp, + br2. (10.13)

The behaviour of the system could be seen by examining the values of rand () in
(10.13) for which r = 0 (i.e. the closed orbit) but B # 0 (i.e. the orbit is alive).
Thus, for the periodic orbit of (10.13), for -00 < ~ < 0 and p, sufficiently small,
we have
(10.14)

and it is easy to see that this periodic orbit is stable (attracting to itself neighbouring
curves from inside and outside) for a < 0 and unstable (repelling) for a > 0, whether
202

the crossing of eigenvalues is from the left, as is usually assumed, i.e. 0'(0) == d> 0
or from the right i.e. d < O. In applied work, therefore, it is sufficient to find d and
a. \Vhile d is very easy to find (d == da/dl-' at 1-'0 = 0), the computation of a could
be messy. We give here Guckenheimer and Holmes' (1986 pp. 154-156) calculations
which we find simpler than most, as follows.
1[1 1 2 2] 1[1(1 1)
a == 16 Illl + 1122 + 1112 + 1222 + 16;1 112 III + 122
- IMlfl + li2) - Itdfl + li2li2] . . . (10.15)
where s~erscripts indicate functions and subscripts, derivative orders, for example
ft12 == Jt'Jl etc.
~
Two cases can be distinguished:
Case 1. The crossing is from the left i.e. d > 0
(i) If a < 0 (d> 0); the origin is a stable focus for I-' < 0 but as I-' > 0, this fixed
point becomes unstable and a stable orbit is born, attracting to itself neighbouring
curves both on the inside and outside: this is a supercritical case. (See fig. 10.4 (i).)
(ii) If a > 0 (d > 0), the origin is a fixed point which is unstable for it > 0, stable
for 1-',0, grows into an unstable periodic orbit as I-' grows more and more negative.
(See fig. 10.4 (ii)). This is the subcritical case.
Case 2. \\Then the crossing is from the right, i.e. d < 0,
(i) If a < 0 (d < 0), the origin is a fixed point which is asymptotically stable for
I-' < 0, unstable for I-' > 0 with an asymptotically stable orbit for I-' < O. This is
exactly fig. 10.4 (i) turned around by 180°.
(ii) Case a > 0 (d < 0) is exactly fig. 10.4 (ii) turned around by 180°.

(i) Supercritical (a < 0)

(ii) Subcrit.ical (a > 0)

Figure 10.4. Hopf Bifurcation (i) Supercritical (a < 0) (ii) Subcritical (a> 0)
The above analysis could be summarized as follows.
 203

Theorem 10.2. (Hopf Bifurcation Theorem). Let:i; = f(x, /-l) : R"+1 - t

Rn have a critical point (x*,/-lo) at the origin and the Jacobian matrix A(/-l) ==
Dxfex*, /-lo) have one and only one pair of pure eigenvalue A(/-lo) = ±i(3(/-lo) such
that o(/-lo) = 0 =1= (3(/-lo) and d == dO(/-lo)/ d/-l =1= 0, i.e. a simple pair of eigenvalues
crosses the imaginary axis at nonzero speed, (from the left if d > 0 and from the
right ifd < 0), then
(i) /-l = /-lo (= 0) is a bifurcation point
(ii) there exists a unique paraboloid (see fig. 10.4) of radius l' = J-/-ld/a passing
through the bifurcation point, places at the origin (xo, /-lo = 0,0). These periodic
orbits are stable (attracting) for a < 0, and unstable (repelling) for a > 0, regardless
of whether the crossing is from the right 01' the left i.e. whether d > 0 01' d < o.
Proof. Hassard and Wan (1981), Marsden and McCracken (1976), Guckenheimer
and Holmes (1986), Arrowsmith and Place (1990), Wiggins (1990), among the major
sources.
Note that the above theorem is stated in its original form as formulated by Hopf.
It has since been further developed and some conditions such as dO(/-lo)/d/-l =1= 0 i.e.
the explicit requirement that a pair of complex eigenvalues must cross the imaginary
axis at nonzero speed, has been found unnecessary (see for example Tan & Tu
(1992)). In this paper we have shown that for the system
:i; = f(x,/-l) (10.1)
where f : Rn+1 - t Rn is aCT-map (1' 2:: 3) and f(O,/-l) = 0 V/-l E R, let /-lo E R
be such that the Jacobian Dxf(O, /-lo) == A(/-lo) has a pair of simple eigenvalues
±i(3(/-lo) = ±i ((3 = 1 for simplicity), with eigenvector VI
Av i = iv i
A*w l = iw i
where A* denotes the transposed cojugate of A and WI its eigenvector. Writing
cpl == Re(eitvl), cp2 == Im(eitv1)
1/;1 == Re (eitw l ), 1/;2 == 1m (e it w 1)
()j == -:r
11211"
J. 0
fx 1""'1"(0,/-lO)(cp1)1/;1 dt

1]j == -:r
1 1211"
J. 0
fx 1" ...1"(0, /-lo)( cpl )1/;2 dt

a == ~! 10211" fxxx(O, /-lo)( cpl )31/;1 dt

b == ~! 10211" fxxx(0,/-lo)(cp1)31/; 2 dt
where fx 1""'1"(0, /-lo), (/-l . . . /-l- j-times) denotes the jth derivative of fx with respect
to fL. We can see that for a 2 + b2 =1= 0, which we assume, if ()1 =1= 0, this system is
exaclty Hopf's bifurcation in normal form above

(IO.IOa)
204

which is exactly (10.10), with (7 = ±1 (f30 = 1), and if (h i- 0, or O} = 0 but

Oei- 0 for some c ~ 2, then (1O.10a) possesses a nonzero solution satisfying some
conditions, then (0,1'0) is a bifurcation point of periodic solutions of (10.1).
The following results have been obtained.

Theorem 10.3. If O} i- 0, then (0,1'0) is a bifurcation point of periodic solution of

(10.1).

Theorem 10.4. If O} = 0 and c is the smallest integer such that Oe i- 0, then (i)
for c even such that aO e(7 < 0 where (7 = ±1, the point (0,1'0) is a bifurcation point
of system (10.1); (ii) for c odd, (0,1'0) is a bifurcation point of (10.1).

Proof. (Tan & Tu 1992). These theorems allow results to be computed explicitly,
as will be illustrated by the dynamic Demand-Supply model in the next section.
Note that our theorems do not need the conditions a'(l'o) = d i- 0 of eigenvalues
crossing the imaginary axis at nonzero speed.

Note that although in high dimensional D.S., the Hopf bifurcation involves heavy
algebra (pages and pages of calculations in Marsden and McCracken 1976 where it
is claimed to take a month to check), in two and three dimensions (n = 2,3), it
is fortunately fairly simple. In the plane (n = 2) for example C(A) = det[(A(I') -
A(I')I] = 0 = A2 - TA + 8 = 0 where T(I') = tr A(I')" 8(1') = det A(I'), the Hopf
bifurcation conditions are T(I'O) = 0 < 8(1'0) where 8(1'0) = A}A2 = A}>:} = f32 > 0
and dT(l'o) / dl' > o. It suffices to find 1'0 fulfilling these conditions.
In three dimensional DS (n = 3) i.e. x E R3, I' E R, the characteristic equation
IS
(10.16)
where c} = -tr A(I') = - 'E~ Ai; C2 = sum of principal minors of A(I') of order 2;
C3 = -detA(I') = -A}A2A3. Hopf conditions are satisfied if Ci > 0 (i = 1,2,3) and
C}C2 = C3. The first conditions, Ci > 0, are just the Routh Hurwitz conditions for
all eigenvalues of A(I') to be in the open left half plane and the second property
C}C2 = C3, together with Ci > 0 are sufficient conditions for the existence of one
negative real eigenvalue and a pair of pure imaginary eigenvalues (see Gantmacher
1954, esp. p. 197). For example A3 + A2 + 2A + 2 = 0 '* A = (-1, ±IAi) and
A3 + 2A2 + 3A + 6 = 0 '* A = (-2, ±1.732i). In practice, to establish the existence
of Hopf bifurcation, it is sufficient to find a value 1'0 fulfilling these conditions.

10.2.3. Some Economic Applications

1. The Keynesian IS-LM Model.

Consider the well known Keynesian model with 2 markets

y = 1'([I(Y,r) - S(Y,r)] commodity market

 205

r= ,8[L(Y, r) - M] money market

where (Y, r) = (income, interest), (f-l,,8) = speeds of adjustment to bring about
equilibrium, I(Y, r) = Investment function, with Ir < 0 < Iy; S(Y, r) = saving
function with Sy > 0, Sr ~ 0; L(Y, r) = liquidity preference with Lr < 0 < Ly and
M = money supply. The system is :i: = f(x, f-l) : R4 -+ R2. The Jacobian of the
linearization A(f-l) == D.:! (x, f-l), treating f-l as the only active parameter (,8 could be
set equal to one),
A(f-l) = [f-l(I~iYSY) f-l{Ifi~rSr)] .

The trace of A = T(f-l) = f-l(Iy - Sy) + ,8Lr

r(f-lo) = 0 for f-lo = ,8Lr/(Sy - Iy)
dr/df-l = Iy - Sy > 0 if Iy - Sy > 0
,82Lr
det A(f-lo) = S _ I [Lr(Iy - Sy) - Ly{Ir - Sr)].
y y

Thus at f-lo = ,8Lr/(Sy - Iy), if Iy - Sy > 0 and Ir - Sr > 0 then Hopf Bifurcation
takes place.

2. Hopf Bifurcation in an Advertising Model.

Advertising models have been more and more rigourously investigated since the
1950's. We shall only discuss Feichtinger's (1992) work in view of our interest in the
application of Hopf bifurcation. Inspired by Baily's (1957) Mathematical theory of
epidemics, advertising is likened to spreading germs. Potential buyers (Xt) catch
these germs through advertisement and contact with brand name users (X2 ):

Xl = k - aXI X 2 + ,8X2 (10.17)

X2 = aXI X 2 + 5X2
where a(t) = aX2 == contact rate with the advertisement at time t, assumed pro-
portional to the number of habitual buyers, ,8 == switching rate to rival brand,
10 =migration, mortality or forgetfulness, with 5 == ,8 +10. Rewriting the above, using
transformations Xl == (ak/5c)X I , x2 == (c/k)X2, T == 5t, , == ak 2/5c 2, ¢ == ,8/5,
u == Xl - 1, V2 == X2 - 1 we have

[u
v] = 1 -,1/J]
[-' 1 [ uv ] + g(u, v) ( -1, ) (10.18)

where 1/J == 2 - ¢ and g(u, v) == 2uv + v 2 + uv 2 •

The eigenvalues of the linearized part of (10.18) is
206

Bifurcation takes place at 10 = 1 where A = ±iw where w == ~. Note that

:"1 Re A = -~ < 0 i.e. the crossing at nonzero speed is from the right (i.e. d < 0 in
eq. (10.13) above). At 10 = 1, we have

-1
A(,o) = [ 1
-1j;]
1

with eigenvector v = [ iw; 1]== ( ~1 )+i ( ~ ) with P == [~1 ~], p- l Abo)P

= [~ -ow] (see eh. 4 eq. (4.38)), and using the transformation ( ~ ) = P ( : ),
we get

( ; ) = [~ -Ow] [ ~ ] + [ ~~:: ~~ ]
where h(x, y) == 2( -x+wy)x+x2 + (-x+wy)x 2 and k(x, y) = O. This is the normal
form of (10.10) where Guckenheimer's a in eq. (10.15), evaluated at x = 0 = y, is

Thus a < 0 and by Theorem 10.2, Hopf bifurcation gives rise to a stable periodic
orbit with 4 phases
(i) prosperity where both Xl and X2 increase
(ii) saturation where Xl declines but X2 still increases
(iii) downturn where both Xl and X2 decrease
(iv) recovery where Xl increases while X2 decreases.
(See fig. 10.5.)

Figure 10.5. Phase portrait of the advertising diffusion model for

1 = 0.9, ¢I = 0.1 with the four regimes (i), (ii), (iii) and (iv).
 207

3. A Dynamic Demand Supply Model.

As another economic application, consider Beckmann and Ryder's (1969) and

Mas. Collel (1986) demand supply model in which price (P) reacts to quantity (q)
and vice versa.
p = k[F(p) - q] (10.19)
q = J.l[p - C(q)]
where price rises in response to the excess demand F(p) over supply (q) and quantity
increases in response to the excess of price over cost C(q). Let us assume k = 1 and
concentrate on the speed of adjustment J.l(> 0) treated as a single parameter of the
model. Let a = dF/dp and e == dC/dq > 0, the Jacobian matrix A(J.l) is

a -1]
A(J.l) = [ J.l -J.lC (10.20)

with r(J.l) = a - J.lC and r(J.lo) = a - J.loC = 0 for J.lo = a/c, dr(J.lo)/dJ.l = -c # 0
and det A(J.lo) = (1 - ac)a/c. The conclusions are (i) if a < 0, r < 0: The model
is stable; (ii) If a > 0, r > 0 for "low" J.l, r < 0 for "high" J.l and r(J.lo) = 0 for
J.lo = a/e at which det A(J.lo) > 0, and 0 < a < l/c with dr(J.lo)/dJ.l # 0: bifurcation
takes place.
We shall now generalize this model slightly by writing D(p, q) - S(p, q) == E(p, q)
and C (p, q), all assumed to be C 3 , i.e. three times differentiable and apply our
approach. Putting x == (p, q), (10.12) and (10.13) become

i: = /(x, J.l) = { ~:: k[D(p, q) - S(~ q)] == ke(p, q) (1O.19a)

q - J.l[p - C(p, q)] = J.l9(p, q).
Putting k = 1 as above, and writing ei == t:;, gi == I;; (i = 1,2) we have
(1O.20a)

and /1l"(0,J.l) = [0 0]
gl g2
Let 60 == 6(J.lo) == det /.,(0, J.lo) = J.lo(elg2 - e2gd where J.lo == -~, we have, at
bifurcation value J.lo,

which possesses a pair of pure imaginary simple eigenvalue ±i{3o where {30 == ~.
It is easy to see that A has an eigenvector vI corresponding to i{3o
208

and A* has an eigenvector WI corresponding to i/3o

and

-1.1 -_
'I' . t [ 0 ] -_ [
cos t [ e 2 ] - sm e2 cos t . ]
-el /30 el cos t - /30 sm t

-1.2
'I' = cos t [ /300] + sm
. t [ e2 ] =
el
[ e2 sin t .
/30 cos t - el sm t
]

./,1
'I'
. t [ /30 ] = [ el cos t
= cos t [ e 2 ] - sIn - /30 sin t ]
-el 0 e2 cos t

./,2
'I'
. t [ et ] = [ /30 cos t +
= cos t [ /300 ] + sm . ett sin t ]
e2 e2 sm

Ot == (JXI-'(O, Ilo), 'ljJt)

= fo21r [e2( e29t - e192) cos 2 t - e2/3092 cos t sin t] dt
= e2(e291 - et92)7r #- O.
Applying Theorem 10.3, we conclude that (O,llo) is a bifurcation point of periodic
solutions of (10.19a). Note that our result.s are not based on Hopf's condition of
eigenvalues crossing at non-vanishing velocity. For details, see Tan & Tu (1992).

4, Generalized Tobin's Model of Money and Economic Growth.

Tobin's (1965) model of the role of money on economic growth has been extended
by Benhabib and Miyao (1981) among other, to incorporate the role of expecta-
tions treated as a parameter which varies gradually from irrational through adaptive
expectations, to perfect foresight and ill so varying, causes a Hopf bifurcation. We
shall present Benhabib and Miyao's (1981) model to illustrate the way Hopf bifur-
cation arises in a three-sector economy. The model is

k= sf(k) - (1 - s)(O - q)m - nk

111 = m( 0 - p - n)
q=ll(jJ-q)
q = elm - L(k,q)] +q
where k, m, q and p are, respectively, the capital labour ratio, the money stock per
head, the expected and actual rate of inflation with the parameters, s, 0, 11, Jl and
€ being the saving ratio, rate of money expansion, population growth rate, speeds
of adjustment of expectations and of the price level. Keeping all but Il unchanged
reduces the model to a one parameter system.
 209

Linearization about the equilibrium point (k*,m*,q*) at which k= 0= m= q

with x = (k - k*,m - m*,q - q*), gives
:i; = A{J.t)x

where
sf' - n -(I - s)n
A{J.t) == [ EmLl -Em
j.tCLl J.tE
whose characteristic equation gives

where Cl = -tr A, C3 = det A and C2 = sum of principal minors of order 2 of

A{J.t). Benhabib and Biyao have shown, by explicit computations that, on the
assumptions of differentiability offunctions L{k, q) and f{k) and existence of a set of
parameters such that all eigenvalues are in the open left plane, Ci > 0 (i = 1,2,3) and
Cl C2 - C3 ~ O. Thus there exist one negative real eigenvalue and two pure imaginary
values A2, A3 = 0 ± i(J such that dRe A2(J.tO)/dJ.t =I 0, hence by Hopf Bifurcation
Theorem, there exist positive periodic solutions [k(t, 8), m(t, 8), q(t, 8)] where 8 =I 0
and small, which collapse to the stationary point (k*, m*, q*) as 8 -+ 0, i.e. the
amplitude of the orbits approaches zero as 8 -+ O. As J.t grows, the system approaches
perfect foresight and instantanious market clearing and furthermore persistent orbits
may exist globally beyond the bifurcation value J.to. The subcritical case would
correspond to Leijonhufvud (1973)'s "corridor stability". The superciritical case is
an attractor. Which one of the two actually happens depends on the value of a
in equation (10.15) which involved third derivatives of the Taylor series. These,
however, do no have economic meaning and thus cannot be determined by economic
considerations.
More applications of Hopf Bifurcation in multisectoral optimal economic control
models by Benhabib and Nishimura (1979, 1981) and Medio (1987a, 1987b) will be
discussed in Chapter 11.

10.2.4. Bifurcations in Discrete Dynamical Systems

The analogy between discrete and continuous dynamical systems has been noted
in Chapters 5 and 6: the stability conditions for continuous systems are Re Ai < 0
for i, and for discrete systems, IAil < 1 for all i, which is best represented as a unit
circle. Some parallel cases are
1. The Fold of Saddle Node Bifurcation

Xn+l = J.t + Xn - x;.

For J.t < 0 there are no fixed points. For J.t > 0, there are 2 fixed points ±..jji.
When J.t increases to J.to = 0, a pair of fixed points (f,p.) is created, one stable
the other unstable: bifurcation takes place at J.to = 0 (see fig. 10.4).
210

2. Transcritical Bifurcation

Xn+! = (1 + J.l)xn + x;.

The fixed point is stable for J.l < 0 and unstable for J.l > O.
3. Flip Bifurcation
Xn+! = -(1 + J.l)xn + x!.
The trivial fixed point loses stability at J.l = O.

4. Logistic System

This has very complicated bifurcation behaviour (see fig. 10.5d): it will be
discussed in the next section, on Chaos.

x x

------~o~\--------~

---
(a) Fold (SN) Bifurcation (b) Flip Bifurcation
(xn+! = J.l + Xn - x~) (Xn+l = -(1 + Il)x n + x!)

x
C.
/(
x
....
•• u

(8)
. •• (u)
.

------~~-------~ --~O~/~--~----~
I

(c) Transcritical Bifurcation (d) Logistic Bifurcation

(xn+! = (1 + J.l)xn + x~) (xn+! = J.lXn{1- Xn))

Figure 10.6. Some Bifurcations in Discrete Systems

 211

For discrete Hopf Bifurcation, we have the parallel of Theorem 9.2.

Theorem 10.S. _Let f(x, p,) R;'+1 -+ R be a one-parameter family of maps

satisfying
(i) fl'(O) = 0 for p, near zero (i.e. P,o = OJ;
(ii) Dfl'(O) has two non-real eigenvalues ~(p,) and X(p,) with I~(O)I = 1 and
> 0 (in general, d~(p'o) / dp, i= O} then there is a smooth change of coor-
d~(p'o) / dp,
dinates such that

or in polar coordinates

where C3, d 2 and f3 are smooth functions of p,.

If C3(0) < 0 (C3(0) > O} then for p, < 0 (p, > OJ, the origin is stable (unstable) and
for p, > 0 (p, < OJ, the origin is unstable (stable) and surrounded by an attracting
(repelling) orbit. The bifurcation at p, = p,o = 0 is said to be supercritical when
C3(0) < 0 and subcritical when C3(0) > O.

Proof. Arrowsmith and Place (1990 pp. 260-262) or Guckenheimer and Holmes
(1986 pp. 162-165).

10.3. Chaotic or Complex Dynamical Systems (DS)

Bifurcation is a route to chaos. Loosely speaking a DS is said to be chaotic or

irregular or complex if it does not fit any traditional patterns such as monotonic or
periodic convergence or divergence, centre or limit cycle and its time series appears
to be erratic as if it was a stochastic model although the system is completely
deterministic and no random factors are present.
Chaos theory is of a recent origin. It is currently an active research area. It
perhaps started with Lorenz's (1963) discovery of very complex dynamics arising
from 3 nonlinear differential equations leading to turbulence in the weather system.
Li and Yorke (1975) discovered that a simple logistic curve can exhibit very complex
behaviour and May (1976) observed chaos in population biology. Chaos has been
applied in Economics by Benhabib and Day (1981, 1982) Day (1982, 1983) Day and
Shafer (1983), Grandmont (1985), Medio (1993) and Lorenz (1993) among many
others. It is obviously impossible to review these contributions here. We shall
restrict our exposition to the unimodal map to illustrate the various concepts, and
to the generalization to higher dimensions chaos in both continuous and discrete
forms. We shall then briefly outline the various routes to chaos, discuss the Liapunov
Characteristic exponent (LCE) and comment on complexity before presenting some
economic applications. The choice of logistic map is motivated by its simplicity and
also by the number of economic applications using this tool.
212

10.3.1. Chaos in Unimodal Maps in Discrete Systems

Consider a first order difference equation

(10.21 )

where I : R2 -+ R or I,.. : R -+ R. We have encountered the linear type I = ax

in Chapter 3 where we have seen that equilibrium or fixed points of (10.21), x* =
I,..(x*) are the points of intersection between I,..(x) and the 45°-line where Xt+l = Xt.
The solution of (10.21) is obtained by iteration (see Theorem 3.1): Xl = I(xo),
X2 = I(xt} = 1[J(xo)] = j2(xo) etc... In the linear case, Xl = I(xo) = axo,
X2 = 12(xO) = a2xo, ... ,Xt = It(xo) = atxo. Furthermore, it will be recalled (see
fig. 3.2 in Ch. 3) that a fixed point x* is stable iff If' (x*) I < 1. If If' (x*) I > 1, it is
unstable. For 1f'(x*)1 = 1 : if I'(x*) = 1, the trajectory is constant over time and
if I'(x*) = -1 a constant cycle, alternating between the same positive and negative
numbers (x, ;r).
When I is not linear, the dynamics can be very complex: bifurcations may arise
leading to chaos. To introduce the concepts of chaotic dynamics, let us consider a
unimodal map in (10.21) where I,..(x) : [0,1] -+ [0,1] i.e. I,.. (x) maps a closed interval
I = [0, 1] to itself, such that
(i) 1,..(0) = 1,..(1) = °
for /.l E U, (e.g. U = {/.l: 1 ~ /.l ~ 4})
(ii) I,..(x) has only one extremum, say maximum at Xc
(iii) I,..(x) is increasing on [O,x c), decreasing on (c,l] and
Xc i.e. I,..(x) is a ~nimodal map
I~(xc) = °at the critical
(iv) I~(O) > 1, I E C 3 with S(f)
that f'(x) =f 0.
=1111/ f' - (3/2)(f" / f')2 < °for all X E [0,1] such
A simplest example of this unimodal closed map is the logistic growth function

(10.22)

=
where I,.. : [0,1] -+ [0,1], 1 ~ /.l ~ 4, or defining /.l 40', (O',x) E [0,1]' I : [0,1]-+
°
° ° ° °
[0,1]. It is easy to see that (10.22) fulfills all 4 conditions above: 1,..(0) = 1,..(1) =
for all/.l, I' = at Xc = 1/2, f' > on [0,1/2]' f' < on (1/2, 1] and 1~{1/2) = for
all/.l i.e. I is unimodal with a maximum at Xc = 1/2. Furthermore, f" = -2/.l < 0,
and S(f) = -(3/2)(-2/{1- 2x)2 < 0: I,..{x) is concave with a single maximum at
Xc = 1/2. S(f) was discovered by Singer (1978) but it turned out to be the well
known Schwarzian derivative used in complex analysis for over a century now. If
S(f) < 0, 1f'1 has no positive local minimum. Note that I,..{x) : [0,1] -+ [0,1] is a
continuous mapping of a closed convex set into itself and hence, by Brouwer's Fixed
Point Theorem, there exists at least one fixed point x* = I(x*), where I intersects
the 45°-line. The trivial one is the origin, which would be the only one if II < 1
(for then I~{O) = /.l < 1, I,.. lies below the 45°-line everywhere). If /.l > 1, there is
another one, the interior or non-trivial one x* = 1 - l/p. (See fig. 10.7)
 213

(a) First generation

(b) Second generation

Figure 10.7. The logistic curve Xt+1 = !jJ(Xt) == Jlxt(l- Xt).

The stability conditions at the fixed point x· are

(10.23)

i.e. x* is an attractor iff 1 < Jl < 3, a repeller iff Jl > 3 with 1f'1 = 1 for Jl = 3 as
the boundary. At the origin, f'(0) = Jl and if Jl < 1, the origin is the only stable
point, an equilibrium of extinction, attracting to itself the whole interval [0,1]. If
f'(0) = Jl > 1, the origin becomes a repeller. For Jl = 2, 1~(1/2) = 0 : h(x)
intersects the 45°-line at its maximum and X* = 1/2 is the only attractor.
It can be proved that
(i) If S(J) < 0 then S(r) < 0 for all n ~ 1
(ii) If S(J) < 0 then 1f'1 has no positive local minima
(iii) If S(J) < 0 then for every periodic attracting orbit, there exists a critical point
of 1 or an end point [0,1] which is attracted by this orbit.
(iv) If all 4 unimodal mapping conditions are satisfied, then IjJ(x) has at most one
attractor in [0,1].
The second generation map is given by

Xt+2 = IjJ(:1.7t+1) = 1[/jJ(xt)] == I;(xt)

= JlXt+1 (1 - Xt+1)

which gives, on substituting Xt+1 from (10.13), a polynomial of degree 4 in Xt having

3 stationary points, two hills separated by a valley whose altitudes are determined
214

by IL: increasing IL increases the maximum and reduces the minimum. Stability
depends on the slope dP / dXt i.e.

{1O.24}

Thus if f' < 1, 1(J'}21 < 1. For example if IL = 3, f' = -1, (J'}2 = {2 - IL}2 = 1
i.e. the slope of the first and second generation are of opposite signs: (J'}2 is tangent
to the 45°-line. For IL < 3, the hump is mild and f2 intersects the 45°-line only once,
but for IL > 3, it intersects 3 times giving 2 stable fixed points xi and xi where
1(J'}21 < 1 and one unstable xi (xi < xi < xi) at which (J'}2 > 1 (see fig. 10.7). As
IL changes and reaches some critical levels, pitchfork or period doubling bifurcations
occur in which a stable cycle of period n becomes unstable and a new stable cycle
of period 2n is generated as IL varies further. More precisely, as IL increases through
the range 3 < IL < 3.57, stable cycles of lengths 1,2,4,8,16 ... are generated. As IL
increases further, 3.57 < IL < 4, an infinite number of bifurcations arise, leading to
chaos (see fig. 10.8).

O / / /-----=-3--~::-----+~
3.5 4
/J

Figure 10.8. Period doubling bifurcations and chaos

Thus, it can be seen from fig. 10.8, the passage to chaos is via a sequence of
period doubling at the points where the pitchfork bifurcations occur. This is a route
to chaos. An interesting aspect of period doubling is that the ratio of the spacings
between the consecutive values of Il giving rise to the bifurcation approaches a
universal constant 8, called Feigenbaum (1978) number where

lim Ilk - Ilk-l = 8 ~ 4.669. {10.25}

k--+oo Ilk+l - Ilk

Finally, note that one of the characteristics of chaos is its sensitivity to initial
conditions: two systems starting at two closely initial points can diverge widely
from each other after a time. This can be illustrated by fig. 10.9 where Il = 3.94 in
all 3 cases but Xo = 0.98, 0.99 and 0.995 respectively. The trajectories are widely
different after about 21 periods.
 215

w~m
0.0 0 5 10 15 20 n SO 15 40 45 10 1

(a) Xt+1 = 3.94 Xt(1- Xt); Xo = 0.98

~Mtj
o.o~o~5~'~0~U~20~25-S~0~S~I"'40"""45""'10 ,

(b) Xt+l = 3.94 Xt(1- Xt); Xo = 0.99

',O~
0.'
0.6
O.C
0.2

o.o~o-5~10""""''''''''''20-2''''...
SO,........U-4....
0 .....
4 ....
' ....
50 ,

(c) Xt+1 = 3.94 xt(1 - Xt); Xo = 0.995.

Figure 10.9. Sensitivity of complex dynamical systems to initial conditions

=
(a) Xo .98, (b) Xo .99., (c) Xo .995. = =

Much of the above discussion can be summarized in the following Theorem.

Theorem 10.6. (Li & Yorke 1975). Let J be an interval and let I : J -.. J be
continuous. Assume there exists a E J such that b = I(a), c = p(a) and d = p(a)
where d ~ a < b < c (or d ~ a > b > c), then
(i) For all k = 1,2, ... , there exists a periodic point in J having period k.
(ii) There exists an uncountable set S 01 J containing no periodic points, such that
lor all p, q E S, p", q,
(a) limn --+oo inf IJ"(P)IJ"(P) - J"(q)1 = 0 < liIDn--+oo sup IJ"(P) - J"(q)1
(b) lor every pES and periodic point q E J, limn --+ oo IJ"(P) - J"(q) > O.

Proof. Li and Yorke (1975).

216

The Theorem says, grosso modo, that if Xt+! = f,..(xt) rises (falls) continuously
for the first 2 periods then falls below (rises above) its original level in the third
period, then
(i) there exists a cycle of period k,
(ii) there exists an uncountable set S of initial points between a and b such that if
Xo E S, the two paths move close to each other at first then diverge after some time.
Moreover, no such paths will converge to any path originating outside S. Thus if f
has a periodic point of period 3, then f is chaotic.

10.3.2. Chaos in Higher Dimensional Oiscrete Systems

Diamond (1976) shows that Li-Yorke's Theorem carries over to the n-dimensional
case. Marotto (1978) extended Li-Yorke's work to provide another route to chaos:
the snap-back repeller. A fixed point x is a repeller if all eigenvalues of D f(x)
exceed 1 in norm for all x E Br(x) where Br(x) is an n-dimensional ball of radius
r and centre x. A fixed point x is called a snap-back repeller if there is some point
Xo E Br(x), Xo =I x, and an integer M such that fM (xo) = z and ID fM (xo)1 =I O. In
non-technical terms, a fixed point x is a snap-back repeller ifit repels a neighbouring
point Xo at first, then eventually (after M periods), attracts it to itselflike a magnet,
i.e. fM (xo) = x, while the Jacobian of fM (xo) remains nonsingular.

Theorem 10.7. (Marotto 1978). Snapback repellers imply chaos in Rn. More
precisely, in the vein of Li and Yorke's theorem, suppose x is a snap- back repeller
for f,.. (x), then
(i) there is an integer N such that for all k > N, there exists a periodic point having
period k;
(ii) there exists an uncountable set S of Br(x) satisfying (ii) of Li- Yorke's Theorem.

Proof. (Marotto 1978).

10.3.3. Chaos in Continuous Systems

Chaos can also arise in n-dimensional continuous dynamic systems where n 2:: 3
(for n = 2, the most complex dynamic is the Limit Cycle). Chaotic dynamical
systems are highly sensitive to initial conditions and characterized by the presence
of a strange attractor, as follows

Theorem 10.8. (Ruelle 1979). Given:i; = f(x, It) : Rn+! -t Rn, a bounded set
A of Rn is a strange attractor if
 217

(i) A is invariant under the flow of the system,

(ii) There exists an open neighbourhood U of A such that all points Xl E U tend to
A as t --t 00,

(iii) The trajectory is highly sensitive to initial conditions

(iv) A is indecomposable i.e. cannot be divided into pieces.

Proof. See Ruelle (1979).

This theorem means, roughly, that starting from a point near A, the dynamic
path is attracted to the strange attractor set A and another path starting nearly,
follows a widely different trajectory after a few periods. The presence of a strange
attractor denotes the presence of chaos. An application will be given in Chapter 10.
Finally, it may be appropriate to mention that chaos is only part of the behaviour
of complex systems. Current research (for example Kauffman 1991) is now being
carried out on antichaos, especially in Biology where order is seen to emerge behind
chaos in cellular differentiation during entogeny: systems are poised between order
and chaos. Research in this area is still at an early stage.

10.3.4. Routes to Chaos

A few main routes to chaos are period doubling, intermittency, horseshoes and
homoclinic orbits. We shall briefly discuss these here.

1. Period Doubling and Intermittency.

We have seen, in the discussion of the logistic map (eq. 10.13) that at the
critical value J-lc = 3, fHx) = 1: the system loses stability through flip bifurcation
and period doubling and is on its way to chaos. For an in-depth analysis of this, see
Arrowsmith and Place (1990 p. 226-234) or Guckenheimer and Holmes (1986 pp.
157-160, 346-349). Intermittency, referring to infrequent and irregular variations, is
another route to chaos. With reference to the logistic map (eq. 10.13),1/0;:::: 3.8284
gives rise to a 3-cycle. A further increase of J-l causes subsequent flip bifurcations
leading to period 3n -cycles: for J-l > J-lo, j3(x) == f(f(f(x))) has one stable and one
unstable fixed point which coalesce for J-l = J-lo and completely disappear for J-l < J-lo
(see fig. 10.10). The system then moves inside a channel and after a few regular
iterations, leaves it in an irregular fashion, in search of a new attractor. This is the
onset of chaos.
218

"--------%,
P < Po
Figure 10.10. Intermittency

2. Horseshoe and Homoclinic Orbits.

Take a square. Compress it horizontally (by a factor a < 1), stretch it vertically
(by a factor f3 > 1) and foldl it back in the form of a horseshoe, and we shall
have a horseshoe map. This was designed by Smale (1963, 1967) to study complex
dynamical systems. We cannot go into it in any detail, for space limitations (see
any textbook on chaos), rather let us note the important role it plays in generating
chaos, its presence behind transversal homoclinic orbits. A homoclinic point (x) is a
point at which the stable W 6 (x) and unstable WU(x) manifolds intersect each other
transversally (see fig. 10.11). Smale and Birkhoff's (see for example Guckenheimer

(a) Intersection of the stable (b) Homoclinic tangle

and unstable manifolds
Figure 10.11. (a) Homoclinic point; (b) Homoclinic tangle
 219

(al (bl (el

Figure 10.12. The homo clinic or saddle connection

(a) the saddle loop and its breaking up with WU
lying outside (b) and WU lying inside (c).

and Holmes Ch. 4 or Arrowsmith and Place p. 165) important theorem, which
was used in the development of Melkinov's theory, proves essentially that if one
homo clinic fixed point x exists, then there are infinitely many other homoclinic
points x since if x lies on W8(X), so do all its iterates, i.e., since WU(x) and W8(X)
are invariant, {pk(x)}f:_oo C WU(x) and {pk(X)}f:_oo C W·(x). One particular
case is the homo clinic or saddle connection where W·(x) = WU(x) (see fig. 10.12).
Intuitively, we can see that, like centres, homoclinic connections are structurally
unstable: a slight perturbation, whether causing a displacement of x to say x or
not, would break up the saddle loop causing a portion of WU(x) to lie either outside
or inside the stable manifold W8(X) (see fig. 10.12(b) and (c)). This is a route to
chaos: stretching and foldings of manifolds are indications of chaotic dynamics. To
illustrate this, let us examine two examples.

Example 10.6. (Abraham and Marsden 1978).

:i;= Hy = 2y
iJ = -Hz: + y(h - H)
where H = x 3 - 3x + y2, with a damping which drives it to the energy level H = h.
°
The level curves of H are shown in fig. 10.12. Clearly:i; = = iJ ~ (x, y) = (±1,0)
and H(1,0) = -2 is at a minimum and H(-1,0) has a saddle point at (-1,0).
The minimum is an attractor when h $ -2 and a repellor when -2 < h. When
H(-1,0) = h = 2 there is a saddle connection as in fig. 1O.12a.

Example 10.7. (Thompson and Hunt 1986).

:i; = ky + J.Lx(b _ y2)

iJ = -x + c
With C as the only parameter of interest, Thompson and Hunt have shown that
for C < C, there is a stable limit cycle inside a saddle point (SP). As C increases,
the limit cycle fuses with the WU(x) and W8(X) and forms a saddle connection, a
homoclinic orbit. As C > C, the saddle loop is broken and WU(x) wanders away in
220

search of some other attractor (see fig 10.13). This is called Blue Sky Catastrophe by
Abrahams and Marsden (1978) to refer to the sudden disappearance of an attractor
into blue sky.

Figure 10.13. Homoclinic orbit and Blue Sky Catastrophe

Homoclinic orbits may also arise in higher dimensions. Some of these are illus-
trated in the 3-dimensional DS in fig. 10.14, for system x = f(x,l') : R3 X R -+ R3
with a homoclinic orbit connecting the origin to itself for I' = 0, but breaking up
under parameter change from J.Lo = 0 to J.L > 0 or J.L < 0, and Al, A < 0 < A3, all
three eigenvalues real. If Al, A2 = (} ± ij3, (} < 0 < A3 the orbit is homoclinic to a
saddle focus (see fig. 10.15).

p.>.

p.-.

p. ••

Figure 10.14. Orbits homoclinic to saddle point

Figure 10.15. Homoclinic orbit of x = f(x), x E R3

for Al, A2 = (} ± ij3, (} < 0 < A3 real
 221

Again if X = f(x, fL) : R3+1 -+ R 3 , a change in the parameter fL E R can break up

the homoclinic orbit as in fig. 10.14. The particular case above where, in addition,
lad < A3, A3 real, is particularly interesting as it leads to chaos, as shown by Silkinos
(1970).

Theorem 10.9. (Silkinov 1970). If Df(x) ofx = f(x): R3 -+ R3 has a pair of

complex eigenvalues with negative real parts, i.e. At, A2 = a ± i(3, a < 0 < A3 and a
real positive eigenvalue A3 such that lal < A3, then the flow <Pt can be perturbed to
<P~ such that <P~ has a homoclinic orbit,' near, and the return map of,' for <P~ has
a countable set of horseshoes.

Proof. Silkinov (1970), Guckenheimer and Holmes (1986 p. 319), Wiggins (1990
p. 602).

10.3.5. Liapunov Characteristic Exponent (LCE)

and Attractor's Dimension

In applied work, LCE and attractors' dimension are important for diagnosing the
presence of sensitivity to initial conditions and hence of chaos. LCE is the Floquet
theory discussed in Chapter 9. It will be recalled that if Ai is an eigenvalue of D f( x)
and cI>t = eD/Ix)! and mi = e>.·t and LCE is

Ai = lim
t-oo
~t In Ie>.·tl
= lim
t-oo
~t Re(Ai)t = Re(Ai).

Thus LCE = Re(Ai): it indicates the rate of contraction (Ai < 0) or expansion
(Ai> 0) near X. Since LCE are defined in the limit as t -+ 00, any finite transients
may be neglected and LCE of Xo and x are identical: the basis of attraction has the
same LCE as the attractor. Note also, as in Chapter 9, one LCE, say At, is always
equal to 0 and hence its corresponding ml = 1. The theory of Liapunov exponents
has been further developed and applied to stochastic trajectories, Kolmogorov en-
tropy but we cannot discuss these here. In addition to the LCE, the dimension
of attractors is also important, fractal dimension, capacity dimension, information
dimension, correlation dimension, Liapunov dimension. We shall not go into these
here. Interested readers should consult Wiggins (1988), Orcut (1993), Medio (1992)
or Lorenz (1993). Finally it should be mentioned that complexity, the "science" on
the edge of chaos, is currently an active research area (see Kauffman 1992, Waldrop
(1992), Lewin (1992) among others). It is still in its infancy.
222

10.3.6. Some Economic Applications

There have been large numbers of economic applications of chaos, for example
Benhabib and Day (1981, 1982), Benhabib and Nishimura (1985), Grandmont (1985,
1986) Day (1982, 1983), Stutzer (1980), Deneckere and Pelican (1986), Boldrin and
Montrocchio (1982), to name a few among deterministic models. We shall discuss
only one or two, just to illustrate the role of chaos in economic analysis.

1. Chaotic Dynamics in a Macroeconomic Model.

Stutzer (1980), developing Haavelmo's (1954) model of endogenous population

growth where the increase in labour force, (NtH - Nt)/Nt depends on per capita
product (Y/N) where Yt = A.,fN; is the production function, as follows

(NtH - Nt)/Nt = 0- /3Nt/Yt = 0: - /3Nt/Afii;.

Defining Xt == Nt![A(1 + 0)//3]2, we have, for 0 ~ 0: ~ 5.75

XtH = F,,(xt) == (1 + 0)xt(1 - .;x;).

Clearly F,,(O) = F,,(1) = 0 for all 0 and f~ = (1 +0)(1- hIX) = 0 at Xc = 4/9 with
F; < 0 i.e. F is unimodal, increasing on [0, xc), reaching a maximum at Xc = 4/9
where F"(xe) < 0 = F'(xe) and decreasing on (xc, 1]. Furthermore, F : [0, 1]-t [0,1]
i.e. F continuously maps a compact interval into itself and by Brouwer's Fixed Point
Theorem, there exists a fixed point X* = F,,(x*). One such point is at the origin,
the other is at the point of intersection, if any, of F with the 45°-line at which
F'(x*) = 1 - 0:/2. This interior fixed point exists so long as 0: > 0 since then
F'(O) = 1 + 0> 1 and F lies above the 45°-line at the origin. The system is stable
if -1 < F' < 1 i.e. if 0 < 0: < 4, unstable if IF'I > 1 i.e. 0 > 4 and IF'I = 1 for
o = 4. In this format, the analysis of the unimodal map (10.22) applies, mutatis
mutandis. (See figs 10.16 and 10.17 which are to be compared with fig. 10.7.)
For the second generation model, stability conditions are IdF 2 / dxl == I(F'W ==
Idxt+2/dxd < 1 which are always met if IF'I < 1 (see eq. 10.24). It can be seen
that the second generation F~(xt) intersects the 45°-line once if 0 < 0 < 4 with
slope I(F')21 < 1 giving a stable fixed point, three times for 0 > 4 giving two stable
fixed points (Xl,X3) where I(F')21 < 1 separated by an unstable X2 where I(F')21 > 1
for Xl < X2 < 3:3 (See fig. 10.17). For 0 = 4, there is a tangent: F~(x) is tangent
to the 45°-line. Simple calculations show that as 0 increases, to a critical value
Oe < 0:3 = 5.54 where there is a period 3 orbit window, the range of 0 within which
a stable orbit of length k first appears and later becomes unstable and bifurcates
to a 2k-period orbit, gets shorter and shorter. The model is stable for 0 < 0: < 4,
 223

unstable for 4 < a < 5.i5; it becomes chaotic at a c = rd. l For a = 5.75, see
fig. 10.18.

1.1

I.'

1.4

1.2

I.II-¥----,-+-~-+_...,;.-H__r+_t-_r__;
!
•
1.1 1.2 1.4 I .• :1.1

'" i~ ;u, i!

Figure 10.16. F = (1 + a}xt{l - ..;xt) Figure 10.li. Difurcation into a

2-period orbit

e.•

e.

Figure 10.18. Trajectory of Xl+! = 6.i5xl{1 - y'Xl), Xo = ~.

1 Note that St.utzer's statement that "... all the harmonics occur prior to Q' reaching 5.540,
although how much prior to this value is not known" (Stutzer 1980 p. 362) has been disclaimed by
Professor H.P. W. Gottlieb who found, on working through Stutzer's model, that this critical value
=
of Q' is precisely Q'c 5.1. I am en deb ted to Professor Gottlieb for communicating this finding to
me ill a privat~ correspondence.
224

2. Erratic Demand of the Rich.

As a further application of chaos, consider Benhabib and Day's (1981) model of

erratic demand when tastes are endogenous, obtained by solving the problem of a
consumer's maximization of utility u = x"yl-,,(O < a < 1) subject to px + qy = m
where x, yare two commodities, p, q their respective prices and m is the consumer's
given income. The solution gives the demand functions

x = am/p
y = (1 - a)m/q.
The dependence of these demand functions on past choices is modeled by

at+! = g(x,y,a) = aXtYt = aXt(m - px)/q.

Substituting this into the demand functions above, using the budget constraint
conditions, give
Xt+l = amxt(m - Xt) == J(x,a,m).
The longrun demand function given by the fixed point x* J(x*) is
x* = (am 2 - l)/am where 1 < am 2 :S 4 to satisfy the budget constraints. The
authors show that when am 2 is close to 1, the f.p. is stable, but when am 2 > 3,
cycles emerge. For (am 2)2( r - am 2) < 8 < 4am 2, a 3-period cycle arises with
period 3 points c = (am 2(4 - am 2)/16, m/2, m 2/4). By Li and Yorke's Theorem,
for c < am 2 :S 4, there exist an uncountable number of initial conditions in [0, m]
which give erratic solution for c :::;j 3.57. This is chaos. The authors give the fol-
lowing interpretation: the smaller a, the larger endowment m must be to generate
chaos: demand converges to a long run pattern for relatively low incomes but ex-
hibits chaos as m grows. This explains "the whimsical behaviour of the very rich"
(p. 463).

3. Structure and Stability of Inventory Cycles.

The role of Inventory Cycles in economic fluctuations was first noted by Metzler
(1941) whose pioneering work has been further developed by many, among which
Gandolfo (1983), Lorenz (1993) and Medio (1993). We shall outline the last three's
approach to show the possible emergence of bifurcation and chaos. The model, with
individual variations and emphasis, has essentially the following features.
(i) Y = 1"(bye_B) = 1"[G 1(D)Y -B] where G1(D)Y == (a2D2+alD+1)Y; D ==-it
operator (see Ch. 2, section 2.3) output (Y) increases in response to the discrepancy
between desired output (ye) and existing stock (B), 1" > 0, b> 0;
(ii) 13 = S(Y) - I(Y) = F(Y) == mY(l - Y) i.e. stock (B) increases when savings
S(Y) exceeds investment I(Y), the difference function F(Y) is assumed unimodal,
m > 0 and Y E [0,1], i.e. F(O) = 0 = F(l);
 225

(iii) Y= OF(Y): output (Y) increases in response to excess investment demand

(I - S)j
(iv) G2(D)Y = F(Y) where G2(D)Y == (D3 + C2D2 + c1D) and F(Y) == rY(l - Y),
> ... - .
r = mJba2 > 0, C2 = (bal - 1Jr)ba2 <: 0, i.e. Y +C2Y + CIY = rY(l - Y): the
dynamic law obtained from (i) through (iii).
It is easy to see that there are 2 equilibria for which iJ = 0 = F(Y) at 0 and 1 i.e.
iJ = 0 {:} F(O) = 0 = F(l)j F(O) is unstable and F(l) is stable iff r < CIC2. Detailed
analysis and investigation of the various values of the parameters of (iv) led to the
conclusion that if r > CIC2, the system loses its structural stability through a Hopf
bifurcation which gives birth to periodic orbits and hence inventory fluctuations.
For some critical values of the parameters, a basin of attraction appears which is
so narrow that the initial points that are not very close to it will diverge from it:
the system, highly sensitive to initial conditions, is on its way to chaos. Lorenz and
Medio have shown that (iv) displays the structure of a Silkinov-type (see Theorem
10.7) under the various assumptions made, a horseshoe-like invariant set and hence
chaos. Slightly different parameter values give rise to multiple compleJt at tractors
whose basin constitutes fractal sets. In the light of their theoretical analysis and
various simulations, both are optimistic about the scope of economic application of
Silkinov's theory.

4. Chaotic Economic Growth with Pollution.

An early economic application of chaos theory was made by Day (1982) who
showed that in the presence of pollution, irregular growth cycles can arise. His
model is as follows
(i) (1 + n)kt+l = sf(kt ) = sBkf(m - kt}'Y where kt = capital per head of population
growing at rate nj s, m are positive constant, 0 < s < 1 being the savings propensity
and (m - k)'Y accounts for the effects of pollution on f(k), B is a constant which
accounts for technical progress. Thus f(k)t = Bkf(m - kt)'Y is the production
function with f(O) = 0 = f(k m ) where k m = m i.e. if pollution m reaches some
saturation level, production is completely choked off (when kt -+ m). This is a
variety of the logistic growth curve, since (i) gives, on simple rearrangement,
(ii) kt+l = w(kt,p,) == p,kf(m - kt)'Y where p, == l":n. (3
If = 1 = '"( = m, (ii) is
kt+l = p,kt (1- kt) and it can be seen that Li-Yorke's theorem applies. For small p,
and ko, growth will exhibit a monotonic convergence to a stable equilibrium. For p,
in the range

~ < p, (_(3 )f3 (_'"()'Y m f3 +'Y < m

(3+'"( (3+'"( (3+'"( -
where If!;y = kc = the kt which maximizes kt+l obtained by d~i.~! = 0, the economy
shows period doubling bifurcations. For p, > p,* where p,* (p$y)f3 (rl:Yf = m 1 - f3 -'Y
226

irregular cycles occur and chaos emerges. It can be shown that chaos will persist
for quite a range of B and hence of J.l.

5. Chaos in Business Cycles.

Rigorous mathematical formulation of Business Cycle Theory started with

Samuelson's (1939) multiplier-accelerator linear models which have been improved
by Hicks (1950) "ceiling" and "floors" and Goodwin's (1951) nonlinear accelerators.
All these, however, can only produce rather "conventional" mathematical patterns
of monotomic or periodic convergence or divergence, and constant cycles: they fail
to explain actual fluctuations which do not seem to fit these moulds. To account
for these unruly vagrancies, the exogeneous stochastic shocks theory has been intro-
duced by Lucas, Sargent and others who argued that without such shocks, the econ-
omy is asymptotically stable about the trend and no fluctuations arise. These views
have recently been challenged by Day (1982) and especially Grandmont (1985) who
used chaos theory to prove that erratic and chaotic fluctuations can indeed arise in
completely deterministic models. Space limitations do not allow us to go into these
here. Indeed, the number of nonlinear Business Cycle models using chaos theory to
explain complex motion of the economy is so enormous, as can be seen by Lorenz's
(1993) impressive review article, as to defeat any attempt to report even some major
ones in the space of this chapter.

10.4. Catastrophe Theory (C.T.)

C.T. was introduced by Thom (1972) and popularized by Zeeman (1976) and
others. It studies the graph M of all critical points (c.p.) of a real valued function
!(x,J.l) : Rn X Rr -+ R (or !Jl(x) : Rn -+ R for fixed J.l) where M is normally an
r-manifold in Rn+r, involving n equations in n variables and r parameters. It anal-
yses not only nondegenerate c.p. x*(J.l) of a regular maximum or minimum, where
variations of x* in response to J.l changes are predictable, but especially degenerate
c.p. where the failure of the Implicit Function Theorem invalidates predictions of a
Comparative Statics type. In the first case, the projection 1f of M into II-space Rr,
1f : M -+ Rr : [x* (J.l), J.ll -+ J.l covers the parameter space with one sheet, and in the
latter, 1f is singular (i.e. rank aJ.l/ax < r), the number of equilibria changes and a
portion of the parameter space is covered by several equilibrium sheets correspond-
ing to multiple extrema. At the points where one equilibrium bifurcates into several
(or where several equilibria coalesce into one), there is an abrupt, discontinuous
change in the state variables (x) concerned. This is the best known aspect of C.T.
C.T. is much too technical to be treated as part of a chapter. We are forced,
by severe space limitations, to by-pass the important technical details such as the
the germs, jets, Jacobian ideals, determinacy of functions and Mather's Theorems,
 227

facilitated by "Siersma's tricks" needed for the calculation of codimensions, which

are used in the unfolding of degeneracies. They are important for a deeper un-
derstanding of C.T. and interested readers should consult Thorn (1972), Zeeman
(1977), Brocker and Lander (1975), Trotman & Zeeman (1976), Lu (1976) Poston
& Stewart (1976, 1978), Hilton (1976), Majthay (1985) among others.
Before proceeding further, note that in C.T. we only refer to I(x, p,) as if it is a
static equilibrium system. In fact, it is, but its underlying dynamics could be spelled
out as
x = -grad V(x, p,) = I(x, p,) (10.26)
where I(x, p,) is the gradient of some potential or objective function V(x, p,) : Rn X
Rr --t R. Then the system is such that its equilibrium I(x, p,) = 0 coincides with
the set of c.p. of V(x) where al;faXj = ali/ax; i.e. the Hessian of V(= Jacobian
of f) is symmetric. This is the gradient system discussed in Ch. 8. The internal or
state variables x vary in "fast" time to reach equilibrium whereas p, vary in "slow"
time, causing the equilibrium to vary smoothly or discontinuously.
We shall start with a discussion of some general concepts, leading to the Morse
and Splitting Lemmas, the unfolding of degeneracies and finally, Thorn's Classifica-
tion Theorem. Two simplest types, the fold and Cusp, will be briefly analyzed and
their economic applications discussed.

10.4.1. Some General Concepts

1. Given a continuous and differentiable function I(x) : Rn --t R a regular

(critical) point x is a point at which grad I(x) :/; 0(= 0). A critical point (c.p.)
is non-degenerate (degenerate) if grad I(x) = 0 and its Hessian HI is non-singular
(singular) at this point.

2. Given two subsets U and V of Rn, a function I : U --t V is a diffeomorphism

if both I : U --t V and its inverse, 1-1 : V --t U are one-to-one, onto, continuous
and differentiable. Two functions I : U --t Rand 9 : V --t R are said to be
right-equivalent at the origin (usually referred to simply as "equivalent"), written
as I'" g, if there is a diffeomorphism h : U --t V such that I = goh (or loh- 1 = g)
i.e. the following diagram commutes

In other words, two functions are equivalent if one could be obtained from the other
by a smooth change of coordinates. For example xy '" x 2 - y2, obtained by defining
228

x' == x + y, y' == x - Y (denoted as x ....-+ x + y and y ....-+ x - y) and writing

xy '" x' y' '" x 2 - y2 or dropping primes, xy '" x 2 - y2. Similarly,

f = (alx + bl y)(Cl2X + ~y)(a3x + b3y), (ai/b, # aj/bj)

'" xy{a3x + bay) using x ....-+ alx + bly, Y ....-+ a2x + b2 y
'" xyx using x ....-+ a3x + bay
'" {x 2 - y2)x = x 3 - xy2, using x ....-+ x + y, y....-+ x - y

which is much simpler to work with.

3. The codimension of an object is the number of equations required to represent

it. This is equal to the difference between the dimension of an object and the
dimension of the space in which it is embedded. It is invariant with the change
of the dimension of the space. For example, the border bet,veen the U.S. and
Canada is one-dimensional (of cod. 2 - 1 = 1) when embedded in the R2-space of
the North America map. However, in the 3-dimensional space, this border becomes
2-dimensional {including the air space} but its codimension remains 1 (= 3 - 2).
Co dimension in this chapter, refers to the parameter space of polynomials having a
singularity at the origin. For example, f = x 3 and g = X4 have, respectively, cod. 1
and 2 since they require one (f"{0) = O} and two (gil = 0, glll(O) = 0) equations
to describe them. In general, system f(x, f..L} : Rn x Rr -+ Rn has cod. n since n
independent equations are required to describe it (i.e. n = n + r - r = dimension
n + r of the space minus dimension r of the parameter manifold).

10.4.2. The Morse and Splitting Lemma

1. The Morse Lemma. Let Xo be a non-degenerate c.p. of f(x} : Rn -+ R. Then

f ~ En ±x~ == x~ + x~ + ... + x; - x;+l - ... - x~. This could be shown by Taylor
expansion, setting f{xo) = 0, remembering that Xo being a c.p., f'(xo) = 0,

f{x} ~ 0 + 0 + !,,(xo)x2/2! + H.O.T.

1 I ~ 2
~ 2xAx+ H.O.T. ~ L...,±x; + H.O.T. (10.27)
1

where A == f"(xo} = Hf(O} = Hessian of f(x) of rank n. This is just like eq. 4.3G,
for the linear case, treated in Ch. 4 above.

2. The Splitting Lemma. If Xo is a degenerate critical point of f(x) : R n -+ R,

grad f{x} = 0 = detHf(xo}. Dut how singular? If Hf(xO) is of rank n - 1, i.e. has
n -1 non-zero eigenvalues, Hf(xO) is of corank 1 (c.f. rank + corank = n) in which
case, by some smooth coordinate changes, f can be split into 2 pieces i.e. f '"
 229

g(xd ± L2 Xf. In general, if H/(xo) is of corank r, (i.e. of rank n - r), there are
some smooth coordinate changes such that near Xo (set at the origin for simplicity),
1 takes the form.
n
I(Xb X2, ... ,Xn) ~ g(Xb ... ,Xr ) ± LX; (10.28)
r+l

i.e. 1 is split into 2 pieces, the "good" Morse piece L~+1 xf which is well behaved and
the "bad" or degenerate piece g(XI, ... ,xr ) which gives trouble. The Morse piece
may be neglected (i.e. X r+1, . •. ,Xn can be treated as "inessential variables" which
could be left out) and effort is concentrated on the degenerate piece g(XI' ... ,Xr ), a
function of r "essential variables". To see this, let r = 1, the critical points obtained
by grad/(x) = 0 = g'(XI) + Li=22x; = (g'(XI),O,O, ... ,0), i.e. if (XI,X2, ... ,Xn) is a
critical point, set at the origin, of I(x) then (Xl, X2, ... ,Xn) = (X?, 0, 0, ... ,0) where
x? is a critical point of I(x) = g(xI) + L xf at the origin. Hence, only g(xd need
be considered.

This is an extremely useful Lemma since it implies that the behaviour of I(x) :
Rn -+ R (n very large) of thousands of variables near a degenerate c.p. can be
analyzed by studying only a much smaller {usually one or two) number of "essential
variables" which is equal to the corank of 1(x) or of H/(xo) : the remaining variables,
being in the good Morse piece, can be ignored. This "reduction of dimension" is
extremely important in applied work. Compare this with Thompson and Hunt's
method discussed in Chapter 9.

10.4.3. Codimension and Unfolding

Our interest in codimension is in its role in unfolding singularities. Intuitively, a

perturbation of a singularity unfolds it, opens it up, to display what is inside. For
example, looking at 1 = x4, we may think that there is only one minimum at the
origin. In fact, I{O) = f'{O) = /,,{O) = IIII{O) = 0 -=I /,,"(0) and there are three
critical points coalescing into one, at the origin. A perturbation obtained by adding
a term f..LX2 to it, unfolds it into 3 separate c.p. x* = (-J-f..L/2, 0, J-f..L/2), 2 minima
separated by a maximum at the origin. (See fig. 10.19.) Furthermore it can be seen
that for f..L < 0, 1 = x4 + f..LX2 has 3 c.p. but as f..L = 0, these c.p. coalesce and when
f. L > 0 there is only one minimum.
More precisely,

Definition 10.1. Let I{x) : Rn -+ R be a singularity (i.e. f'(x) = /,,(x) = 0).

Then F{x,f..L) : RR X Rr -+ R satisfying F(x, 0) = I(x) is called an unfolding of 1
wi th r parameters. For example F (x, f..L) = xl + f..LX is an unfolding of 1(x) = xl.
Clearly F(x,O) = I(x). Similarly, F{x, f..L) == x4 + f..L2X2 + IllX is an unfolding of
I(x) = X4, with F(x, 0) = I(x).
230

Figure 10.19. Unfolding I = X4 + pX2 •

Definition 10.2. Suppose F : Rn x Rr -+ Rand G : Rn x RS -+ R are both

unfoldings of I, then G is said to be induced from F if there is a differentiable
mapping \II : R" -+ Rr with \11(0) = 0 and P: Rn X RS -+ Rn with P(x, 0) = x \:Ix E
R n, 1 : R" -+ R with 1(0) = 0 such that
G(x,p) = F[PJ'(x), W(p)] + I(P). (10.20)
This means that G is said to be induced from F if they are equivalent, i.e. if by
smooth changes of coordinates, they can be made to differ only by a constant ,(It)
called a shear term, which takes care of constant terms if any. It will be recalled that
9 ,...., I if there exists a coordinate transformation h : Rn -+ R n such that loh = g.
Example 10.8. Given I(x) = xl and two of its unfoldings Fa,b(X) = x3 + ax + b
and Gu.tl,w(x) = xl + ux2 + v:z; + w. Translating the latter to its "centre of gravity"
by defining x == y - u/3 gives
Gu,tJ,w(Y) = (y - u/3)l + u(y - u/3)2 + v(y - u/3) + w
= yl + (v - u2/3}y + (2/27}u l - uv/3 + w
where (a, b) = \II(u,v,w) = [(v-u 2/3), (2/27)u l -uv/3+w]. Comparing F with G,
we found that in the new coordinates, a in F is now v - u 2 /3 in G and b in F is now
(2/27)u l - uv/3 + win G and no constant terms left over after the transformation,
so that I(P) = o. Thus F induces G.
Definition 10.3. If F induces all the unfoldings of I then F is said to be versa!'
\Vhen a versal unfolding has the least possible dimension, it is called a miniversal
(or universal) unfolding. In other words an unfolding is said to be miniversal if it
uses the minimum number of parameters to unfold a singularity. For example Xl
having codimension 1, requires only one parameter to unfold it, x3 + px, 'whereas
x4 being of codimension 2, requires at least 2 parameters, x4 + It2X2 + PIX to unfold
it. Thus, fig. 10.19 only gives a partial unfolding of X4 : a complete unfolding will
provide the Cusp Catastrophe as will be seen later.
 231

10.4.4. Classification of Singularities

We are finally coming to the Classification problem. It will be recalled that given
a function f E En,
(i) If df(O) =I 0, then f(x) is right equivalent to Xl, by the Implicit Function Theorem
(1FT);
(ii) If df(O) = 0 =I det[8 2f(O)/(8x;8xj))' then by the Morse Lemma, f '" L\ ±xr
(iii) If df(O) = 0 = det[82 f(0)/(8x j 8xj)] of corank r < n, then by the Splitting
Lemma, f '" g(XI, ... ,xr) + L~+l ±xr.

Theorem 10.10. (Thorn 1972). Let f(x, /-L) Rn+r -t R be of

cod (I) ~ 4. Then f is right equivalent to one of the following forms
(i) Xl

(ii) L\ ±x;
(iii) g(XI) + L~ ±xr where g(xt} = xt xi,xf or xy
(iv) g(XI' X2) + L3 ±x; where g(XI' X2) = XIX2 ± x~ or XIX2 + x~.

Proof. (Thorn 1972 or Trotman & Zeeman 1976 or Brocker & Lander
1975). Note that the first two cases of Thorn's Theorem, being non-degenerate and
well behaved, we only need to focus on the last two, with corank r = 1 (case (iii))
and r = 2 (case iv) with cod (I) ~ 4. It is well known that r(r + 1)/2 ~ cod (I).
C.T. deals with cod (I) ~ 4. This implies that no matter how many variables
f has, so long as its codimension is ~ 4, we can always find a coordinate system
such that no more than 2 essential variables are involved. In other words, Thorn's
Classification Theorem says that if f is degenerate and with cod (I) ~ 4, then
there is a diffeomorphism h of the neighbourhood of the origin with h(O) = 0 such
that fOh-I(XI, ... ,Xn) =g(Xt}+L~ ±x; (case (iii)) or foh- l =g(XI,X2)+L3 ±x;
(case iv) and all these singularities can be classified into 7 types of elementary
catastrophes with cod (I) ~ 4 whose miniversal unfolding, writing Xl == X and
X2 == Y and parameters /-L as /-L = /-LI, /-L2, /-L3, /-L4, are given in Thorn's list in Table
10.1. (Note that subsequently, 4 additional types have been found making for the
11 elementary catastrophes, cod (I) ~ 5, but there is no need to enter this here).

Table 10.1. Thorn's list of 7 elementary Catastrophes

g Corank Codim. Name Miniversal Unfolding
x3 1 1 Fold X3 +PIX
X4 1 2 Cusp x4 + P2x2 + PIX
X5 1 3 Swallow Tail X5 + P3x3 + P2x2 + PIX
x6 1 4 Butterfly x6 + P4x4 + P3X3 + P2x2 + PIX
X3 _ xy2 2 3 Elliptic Umblilic x3 - xy2 + P2(X 2 + y2) + PIX + P3Y
x3 + y3 2 3 Hyperbolic Umbilic x3 + y3 + PIXP + PIX + P3Y
y4 + x2y 2 4 Parabolic Umbilic X4 + x2y + PIX 2 + p2y2 + P3X + P4Y
232

We shall limit our discussion to the first two types because of their wide
applicability, and their simplicity, but also because the remaining types are simply
combinations of these two. A catastrophe "organizes" lower orders: a cusp organizes
2 folds, a swallowtail organizes 2 cusps, a butterfly organizes 2 swallowtails etc ...

10.4.5. Some Elementary Catastrophes

1. The Fold Catastrophe.

A Fold Catastrophe is a function of the form ±xf + Ei ±xr whose miniversal

unfolding, neglecting the Morse piece Ei ±x~ and writing Xl, /-ll without subscripts,
gives
F(/-l,x) = ±xl + /-lx. (10.30)

(a) A Primal Fold Catastrophe (b) A Dual Fold Catastrophe

Figure 10.20. The Fold Catastrophe

Its critical points, for the primal fold xl + /-lX, are given by F;(x) == 3x2 + /-l = 0,
i.e. x· = ±J-/-l/3 which are defined only for /-l < O. F;(x) = 6x ~ 0 for ~ 0
i.e. on the negative portion of the /-l-axis, F is a minimum for X > 0, a maximum for
X < O. The maximum and minimum coalesce into an inflexion point at the origin
where (x, /-l) = (0,0) and disappears for /-l > 0 (see fig. 10.20). The catastrophe set
consists of one point: the origin. For the dual fold _xl + /-lx, the axes are reversed,
i.e. F' = -3x2 + /-l = 0; F" - 6x ~ 0 for X ~ 0 (see fig. 10.20). Thus, in the dual
 233

case, for example a decrease in J.l causes the equilibrium x to decrease until J.l = 0
when it disappears altogether. An economic example of this is the shutdown of a
firm, which will be discussed later.

2. The Cusp Catastrophe.

A Cusp Catastrophe is a function of the form ±x! + 'E 2 ±x~ whose unfolding,
(see Thorn's list in Table 10.1), neglecting the Morse piece and writing Xl as X, gives

(10.31 )

The critical points obtained by F;(x) = 4x 3 + J.lI + 2J.l2X = 0 (for the primal Cusp)
form the equilibrium manifold M : J.lI = -4x 3- 2J.l2X which, for the various values of
J.l2, are shown in fig. 10.21(a). Stacking these curves together gives the equilibrium
manifold M : F;(x) = 0 in fig. 1O.21(b) whose projection on the parameter space
J.l E R2 gives the cusp in fig. (d) and on the X - J.l2 plane (fig. c), gives a supercritical
pitchfork bifurcation. Fig. (b) shown that M has one equilibrium sheet where F' =
o ¥ F" and 3 equilibrium sheets, two minima (attractors) separated by a repeller
maximum sheet in the middle, when F' = 0 = F". The parameter space (fig. d) is
covered by one equilibrium sheet almost everywhere i.e. everywhere except the area
under the degenerate critical points within the cuspidal curve "y : 27 J.lr + 8J.l2 = 0
obtained by solving F' = 0 = F" (i.e. F" = 0 ~ J.l2 = -6x2, substituting into
F' = 0 gives J.lI = -4x3 - 2J.l2X = -4x3 + 12x3 = 8x 3. Thus J.lr = (8x 3)2 = 64x 6 =
64(-J.l2/6)3 = -8J.lV27 giving "y as 27J.lr + 8J.l2 = 0). This triple equilibrium zone
can be seen by partially unfolding x4 by F(x, 0, J.l2) = x4+J.l2X2 (fig. (e) which shows
one critical point for J.l2 > 0, 3 for J.l2 < 0 which all fuse together at J.l2 = 0, and
give the triple equilibrium zone in fig. (f) or (d). "y is also referred to as Bifurcation
set or Catastrophic set defined as the set of values of J.l such that F~ = 0 = F:
giving "y : 27J.lr + 8J.l~ = O. This indicates the appearance or disappearance of
the attracting equilibrium sheet. In fig. (b), for example, starting from (d), as J.lI
increases, the equilibrium path moves to (e) where M folds over, F" = 0 and the
minimum disappears. The path cannot follow the middle repelling sheet, and must
drop to (f) on the lower attractor sheet. This explains how an infinitesimal increase
in some parameter J.lI could bring the system to the edge and cause a catastrophic
drop of X to the lower sheet. Once there, if J.lI subsides, the equilibrium path moves
back to (g) where again the minimum disappears and x jumps to (d), the attracting
sheet, by-passing the repelling middle sheet. This shows how a gradual change in
J.lI only causes gradual changes in some cases (J.l2 > 0) such as a - b - c path and
abrupt changes in x such as path d - e - f - 9 - d in some other cases (J.l2 < 0).
234

(c) (b)

(e) (d)

Figure 10.21 The Cusp Catastrophe

Finally, note that the above discussion refers to the primal Cusp for definiteness.
For the dual Cusp, _X4 + JlIX + Jl2X2, the same analysis applied with axes reversed.
For example.

)11
 235

10.4.6. Some Economic Applications

1. The Shutdown of the Firm (Tu 1982).

As an illustration of the Fold Catastrophe, let us consider a firm producing a

commodity x, selling at price p in a perfectly competitive market. Its total cost C(x),
of a conventional type, is C(x) = x 3 + ax 2 + bx + c which is C(x) = x 3 + ax + /3,
using the coordinate changes x H x + a/3, a H 3r 2 + 2ar + b where r == -a/3 and
/3 H r3 + ar2 + br + c. (If confusion should arise, we can write C (x) = x 3 + ax + /3 as
C(y) = y3 + ay + /3 where y == x + a/3. However, in the Catastrophe conventional
language, the definition x H x + a/3 is abundantly dear). Total revenue is px and
the profit function is 1T(X) == px - x 3 - ax - /3. Since profit maximization is not
affected by /3, 1T( x) could be translated to

f(x,p - a) == 1T(X) + /3 = _x 3 + (p - a)x.

Assuming unchanged technical production and cost conditions, i.e. constant a and
/3, the only relevant parameter is the market price p which goes up and down in
response to demand and supply conditions at the industry level, over which the firm
has no control. Thus f is our potential function which has been brought to the
canonical form of a Fold Catastrophe whose critical points are given by

f'(x) = -3x 2 + p - a =0
< 0 (i.e. x > 0) for a maximum
f"(x) = -6x { > 0 (i.e. x < 0) for a minimum
= 0 (at x = 0) for a degenerate c.p.

Now 3x 2 = p- a is a parabola with (p- a) as axis of symmetry (see fig. 10.22). The
critical output is x = ±J(p - a)/3 which has no real root for p - a < 0, 2 roots
corresponding to a maximum and minimum for p - a> o. The profit maximization
path follows the maximum branch as p varies. A price fall brings about a decrease
in p - a and hence in output x. The firm will eventually incur losses but would
continue producing until the maximum completely disappears, at the origin where
the maximum and minimum coalesce, with p - a = 0 and x = 0 and disappear for
a slightest further drop in prices. Thus, profit maximization conditions are simply
x* = J(p - a)/3 and p - a> 0 i.e. MC = M Rand p > AVC(y). This can be seen
by writing AVC(y) = y2+a = (p-a)/3+a, and p > AlI"C(y) ~ P > (p+2a)/3 ~
236

2p> 20: =? P > 0: (where y I-t x + a/3 above).

f(x.p-a)

p-a

Figure 10.22. The Shutdown of a firm.

Finally, note that although the above problem is formulated as a static optimiza-
tion problem as is customary in the literature, it can be made explicitly dynamic by
spelling out the gradient function as

i.e. output moves in the direction of profit maximization. The analysis remains
unaffected.

2. Kaldor's Trade Cycle.

Kaldor's (1940) Trade Cycle model has been re-examined and formulated as a
Limit Cycle by Chang and Smyth (1971) and as a Catastrophe model by Varian
(1979), George (1981) and Tu (1981). A potential function V(x) can be defined
such that
x = -dV/dx = k[I(x,a) - S(x,b)]
where x is GNP and I(x, a), S(x, b) are the aggregate Investment and Saving func-
tions respectively, I, S E C 2 , a and b are shift parameters, k is a positive constant
speed of response (k = 1 for simplicity). Kaldor's I(x, a) is a member of the one-
parameter sigmoid function (for example I(x,a) = a + tanhax where a is a shift
parameter, causing I(x, a) to move up and down, to reflect Keynes' volatile busi-
ness expectations): it is flatter at low and high incomes and steeper in the medium
income range. S(x, b) is steeper at low and high income levels and flatter in the
medium income range for example S(x, b) = (x - b)3 i.e. 0 < aI/ax < as/ax at low
and high x, 0 < as/ax> aI/ax at medium income range (see fig. 10.23).
 237

An increase in expectation a causes I(x, a) to shift upwards, bringing the stable

equilibrium point A closer to the unstable point C until these

I,S I,S I,S I,S

s s
S
B 1 BJIj
,,~
/~
,(t, C B y-I
r
7.' C ~
L.
.~?
I
~ '.!:.,
"/ ---A C ;'
_A .,...,'
.I"J A
0 x 0 x 0 x 0 x

Fig. 10.23 Kaldor's Trade Cycle

Fig. 10.24 Kaldor's Catastrophe

coalesce and disappear, leaving the equilibrium path under the influence of a single
attractor point B. At B, investment saturation will cause a to fall, eventually,
causing I(x, a) to shift downward, C to emerge and BC to coalesce into an unstable
inflexion and abruptly fall to A. Note that a change in b causing the saving function
S(x, b) to move leftward or rightward, could corroborate these effects.
In terms of Catastrophe Theory, a degeneracy occurs when a stable (I - S =
o < S' - I') and unstable (I - S = 0 < I' - S/) equilibrium points coalesce,
i.e. V' = 0 = V" which is the case when I and S are both equal (i.e. V' = 0 = 1- S)
and tangent (i.e. V" = 0 = I' - S/) to each other, an abrupt change in x will be
observed. Furthermore, it can be seen from fig. 10.23 that if b is high, i.e. society's
savings propensity is low, a rise in business expectation a, causing an upward shift
in I will simply result in a gradual increase in income x : A and C come closer to
each other but do not fuse (see path c.d.e): no catastrophic changes are recorded.
But if b is low, i.e. savings propensity is high, a change in business expections a will
easily cause a coalescence of A and C or Band C and a consequent catastrophic
change in x, as illustrated by the equilibrium path 1-2-3-4-5-6 in fig. 10.24.
Varian (1979) and George (1981) introduced the wealth (w) effect into Kaldor's
238

model, which is augmented as

ills = C(y, w} + l(y,k} - y

k= l(y,k} -10

'where y = GNP, k = capital stock, s = constant speed of adjustment, C(y, w),

l(y, k} = consumption and Investment functions. The equilibrium manifold, with
w and k as . parameters, is depicted in fig. 10.25 where it can be seen that the
equilibrium income manifold is one-sheeted for low w, and three-sheeted for high
w. Let a stock market crash affect w. IT the shock is small, there 'will be a gradual
decline in k then a jump return to the upper sheet. IT the shock is large, causing a
substantial decrease in w, the return is gradual.

Figure 10.25. Varian and George's version of Kaldor Catastrophe

3. A Catastrophe Theory of Defence Expenditure.

Economists have no theories of Defence spending beyond the explicit recognition

of the opportunity cost of guns (x) in terms of butter (y) forgone, in the context of the
production possibility frontier. Armament is a non-economic item. But this is not
true: defence has its costs, both actual and opportunity costs and enters the social
utility function U(x, y}. How much should be spent on armament? In peacetime,
defence spending is a waste. If war breaks out, any armament level would seem
inadequate. The absence of an economic theory of defence could be explained by
this irregularity which is recalcitrant to conventional economic modelling. With its
costs and protection aspects taken into account, a theory of armament and defence
spending in general could be formulated as a Cusp Catastrophe model along Isnard
and Zeeman's (1976) line. These authors identified the 2 unfolding parameters as
threat (ILl) and cost (1L2) and set them up as a hypothesis to start with: defence
spending (x) is a smooth increasing function of threat (ILl) for low costs (1L2 < 0)
i.e. if costs are low, public opinion is unanimous on increasing defence expenditure
in reponse to higher threat. nut when costs are astronomical, public opinion is split
between war and peace, polarized between hawks and doves: x is a discontinuous
increasing function of threat for high costs. This is a typical cusp catastrophe in
 239

Thorn's list in Table 10.1: g(x) = -"'44 + e;x2 + J.lIX whose equilibrium manifold,
obtained by g'(x) = 0 is
_x3 + J.l2X + J.lI = 0
which reflects the hypothesis as can be seen in fig. 10.26(a). Stacked together, these
curves form a cusp catastrophe whose bifurcation set or cuspidal curve -y, satisfying
g'(x) = 0 = g"(x), is obtained by a projection of the equlibrium manifold on the
parameter space, is 27J.l~ = 8J.l~ (see fig. 10.26(b)).

x
~2 <0 ~2 =0 #-12> 0
(low cost) (high cost)

-------+-------~l ------~------~l ------~-----~l

Figure 10.26 (a)

III

Figure 10.26 (b) Defence Catastrophe

This model explains and predicts defence expenditure: at low costs (J.l2 < 0),
defence spending is a smooth increasing function of threat: it moves, say, on curve
a - b - c in fig. 10.26, but at high costs (J.l2 > 0), opinion is split and defence
budget may follow path d - e - f - 9 where at the edge e, it suddenly jumps from its
lower to its upper equilibrium sheet, at f: defence is suddenly stepped up at high
240

costs and threat. When threat subsides to some critic.allevel g, at the edge of the
fold, defence is suddenly dismantled, military bases are closed and defence budget
is abruptly cut to its bare minimum at d. Note the hysteresis phenomenon inherent
in every cusp catastrophe: the jump from the lower to the upper equilibrium levels
at e and from the upper to the lower level at g, occur at two different levels of
threat (ILl). This explains the irregular (non-smooth) movement in defence budget:
it changes smoothly in some cases and abruptly in some others. Isnard and Zeeman
also developed this model into a butterfly catastrophe with 2 additional cusps where
the two additional unfolding parameters are identified as bias (IL3), biasing opinion
into stepping up or winding down defence spending and butterfly (IL4) splitting one
cusp into three.

4. Innovation, Industrial Evolution and Revolution.

Analysing the data on aggregate investment places in \Vest Germany for the
1956-1978 period, Mensch et al. (1980) found clear evidence of the thresholds of a
typical cusp catastrophe. They identified two types of investment: the traditional
expansionary (e) (wooden ploughs accumulated over wooden ploughs) and rational-
ized revolutionary (r) investment such as automation. Their various assumptions,
based on their observations, their statistical analysis and their various coordinate
changes led to a standard cusp catastrophe whose equilibrium manifold is given in
fig. 10.27. It summarizes all their findings: with low r, output x increases only
slowly and smoothly 'with traditional investment but at high levels of innovation
(r), output takes off into its higher equiligrium level. This model inspired Balasko
and Boyer (1981) to formulate a cusp catastrophe model of technical progress and
employment, using the same concepts of x, e and r but arriving at the cusp model
by different routes.

Figure 10.27. Innovation and industrial revolution

 241

10.4.7. Comparative Statics (C.S.),

Singularities and Unfolding

C.S., it will be recalled, studies the displacement of equilibrium l(x,J.l) = 0 in

(10.2) caused by a change in some parameter J.l. We have seen that whether I(x, J.l) is
a vector field, a gradient dynamic system or simply a static optimization condition,
so long as dl = 0 ¥ cP I, x* = x(J.l) by the Implicit Function Theorem (1FT),
the equilibrium manifold M is one-sheeted and CS results concerning sgn ox* /OJ.l
obtain. If, however, for some J.lo, the c.p. becomes degenerate, i.e. dl = 0 = cPI, the
1FT breaks down, x*(J.l) changes discontinuously, bifurcation takes place, giving rise
to the singularity of the mapping 7T : Rn+r --* Rn : the parameter space is covered
by more than one sheet, x*(J.l) becomes multivalued and C.S. predictions are no
longer simple. In the Saddle Node (fig. 10.2(a)) or Fold Catastrophe (fig. 10.20),
the equilibrium path is still predictable: repelled by the unstable sheet, it always
follows the stable sheet acting as an attractor. But when the equilibrium path
bifurcates into 2 stable equilibrium arms (separated by an unstable branch) such
as the supercritical pitchfork (fig. 1O.2(c)) or Cusp Catastrophe (fig. 1O.21(c)), the
equilibrium path has to decide between two equally attracting branches (fig. 10.28),
an impossible decision without further information. This is the buckling problem
(see Zeeman 1976 or Thompson & Hunt (1973)): a column classical Euler (1744)
subjected to an axial load J.l will buckle at some critical load J.lC.

x x

s s

---"o+----JJ ----ri----T

s s

(a) Euler buckling (b) Tax buckling

(JJx - x3 = 0) (TX-X 3 =0)

Figure 10.28. Bifurcation and C.S.

But will it buckle upward or downward? Similarly, an increase in tax (r) past some
critical level rc (set at 0) could cause an increase or decrease in equilibrium national
income. Mathematically, this is :i; = J.lX - x3 where x is the displacement of the
column and J.l an axial load in the Euler problem, and x is the displacement of
equilibrium income and J.l = r = tax parameter. The C.S. problem is to predict the
direction of the equilibrium path when J.l increases past J.lc (located at the origin),
i.e. ox* /OJ.l ~ O. Without further information, C.s. predictions are impossible. This
242

is where unfolding comes to the rescue. We know from the above analysis that a
miniversal unfolding of 9 = X4 (x = f = g' = 4x 3 ) requires 2 parameters, say J.l and
J.Lo i.e. _x 3 + J.LX + J.Lo where J.Lo is a "side load" , an "imperfection parameter" in the
Euler buckling problem, and J.Lo is a measure of income distribution in the economic
problem. With such a miniversal unfolding, the C.S. predictive power is restored:
the direction of the buckling depends on the side load J.Lo (see fig. 10.29).

x x

o/·c
-----+-----p

Figure 10.29. Unfolding and C.S.

In the economic problem, an increase in tax rate past the critical level Tc in a country
where income is very unequally distributed, with the majority of people being poor,
and having to work harder to make ends meet, will lead to an increase in income. In
the opposite case where income distribution is more equal, most people are well-off,
the disincentive effect of taxes may cause equilibrium national income to fall.
This is the miniversal unfolding problem. In the Cusp Catastrophe, for example,
it is easy to see from fig. 10.21 that at J.Ll = 0 = J.L2, it is impossible to predict
the equilibrium path of x resulting from a decrease in J.L2 (from J.L2 = 0 to J.L2 < 0
while keeping J.Ll = 0) : the equilibrium path can either end up in the upper or
lower equilibrium sheet. But with a slightest change in J.Ll (which is Euler's "side
load" or the income distribution index in the economic problem), the equilibrium
path becomes completely predictable: from J.L2 = 0 = J.Ll, a decrease in J.L2 past zero
will cause the equilibrium path of the Cusp Catastrophe of fig. 10.21 to land on the
upper equilibrium sheet if J.Ll < 0 and on the lower sheet if J.Ll > o.
Thus we can see that the supercritical pitchfork bifurcation x = J.lX - x 3 (see
fig. 10.2(c)) is structurally unstable in that a small perturbation will give rise to
a topologically different equilibrium set: it has only one parameter J.L where two
are needed. This brings together Bifurcation and Catastrophe theories: the stable
cusp catastrophe is the unfolding of the pitchfork: it stabilizes it by adding another
parameter to meet the requirement of a miniversal unfolding of a degeneracy of
codimension 2 (see section 10.4.3).
 243

10.5. Concluding Remarks

This chapter brings B.T., Chaos and C.T. together under the more general head-
ing of Singularity Theory. It is long, although it did no more than scratching the
surface of the problem. It is hoped, however, that it has provided a plain, nontech-
nical, introductory, but nevertheless fairly comprehensive discussion of the various
aspects of these theories and issues involved. For example, much controversy has
been aroused by C.T. especially in many applications where there is hardly any
mathematics involved. The presentation of C.T. in this chapter clearly shows that
it is indeed a respectable mathematical theory, which many users may not fully grasp
in their applications. On the other hand, some critics seem to overlook the impor-
tant fact that there is no need to know exactly the form of the underlying potential
function. With the use of the various coordinate changes, the Splitting Lemma,
we only need to identify those variables in the degenerate set, its co dimension and
miniversal unfolding with the unfolding parameters and apply Thorn's theorem to
obtain useful results which are not available by using other conventional tools of
analysis. Similarly, B.T. has drawn our attention to the possibility of optimal eco-
nomic fluctuations which were considered a contradiction in terms until recently.
Furthermore, it has been shown that, contrary to the popular belief, exogenous
stochastic shocks are by no means necessary for the emergence of Business Cycles: a
completely deterministic economic system, not subjected to any exogenous shocks,
can display chaos and fluctuations. These and many other applications show the
usefulness of a thorough understanding of the mechanism of B.T., Chaos and C.T.
Chapter 11

Optimal Dynamical Systems

11.1. Introduction

So far, we have studied various aspects of dynamical systems. In this Chapter,

we shall discuss the ways to control them in order to achieve some specific objectives
and thus obtain optimal dynamical systems (ODS).
As we have seen in Ch. 8, the Lagrangean (LDS) (eq. 8.2) and Hamiltonian
Dynamic Systems (HDS) (eq. 8.3) are equivalent to each other, as proved in Theorem
(8.4) and illustrated by an economic example (Example 8.2), which one is used is a
matter of taste. However, since the L.D.S., an outcome of the Calculus of Variations,
dating back to the XVII-th century (see Tu 1984), suffers from some shortcomings
(see Tu 1991 p. 113), which have been overcome by Optimal Control (OC) theory,
only the latter need be studied.
O.C. theory, developed by Pontryagin et al. (1962) who called it the Maximum
Principle would require a book to cover. However, with the background provided
in Chapter 8, its main features can be presented in an elementary and yet fairly
comprehensive manner in this chapter. The elements of the Maximum Principle
will be presented first. The ensuing HDS will be discussed next. This will be
referred to as Optimal Dynamical Systems (ODS) in view of the optimal control
mechanism built into them, which ensures that the Hamiltonian flow (XH ) in (8.20)
is optimal, in that it imparts a maximum or minimum to some objective functional in
question. Both the necessary and sufficient conditions as well as the transversality
conditions will be examined. Emphasis will be placed on perturbed Hamiltonian
Dynamical Systems (PHDS) in view of their importance in Economics. Asymptotic
stability will be discussed as well as structural stability which is destroyed by Hopf
bifurcation giving rise to optimal limit cycles and strange attractors giving birth to
chaos. Economic applications will be given to illustrate the analysis.

11.2. Pontryagin's Maximum Principle

An important tool of Dynamic Optimization is Pontryagin's (1962) Maximum

Principle, also called Optimal Control (O.C.) theory. This is sometimes referred
to as Modern Calculus of Variations to stress its resemblance with the Classical
Calculus of Variations from which Pontryagin's Theorem could be shown to be
derived. It consists of finding some control vector u(t) E U c Rr (for example
U = {Ui : ai ::; Ui ::; bi }) from a class of piecewise continuous r-vector functions such
246

as to bring the dynamical system

x(t) = f[x(t), u(t), t] (11.1)

from some initial state Xo E R n at t = 0 to some final state x(T) at t = T such as

to impart an extremum to some objective functional J(u) where

J(u) = l fo(x, u, t) dt + S[x(T), T] (11.2)

where f : Rn x RT X R -t Rn, fo : Rn x W x R -t Rand S[x(T), T], called the
"Scrap" or "Salvage" function, indicates the value of the programme at the terminal
period T.
Pontryagin's [1962] Maximum Principle can be summarized in a Theorem.

Theorem 11.1. {Pontryagin 1962}. Let u*(t) be an admissible control r-vector

which transfers (xo, to) to a target (x(T), T) where T and x(T) are, in general, not
specified. Let x*(t) be the trajectory corresponding to u*(t). In order for u*(t) to
be optimal, it is necessary that there exist a non-zero continuous vector function
p*(t) E Rn and a constant scalar Po such that
(a) p*(t) and x*(t) are the solution of the canonical form

x.*( t ) = 8H
8p (* * * )
x,p,u,t (11.3)

P.*( t ) = - 8H
8x (*
x, p *, u * , t ) (11.4)

where H == ~o Pih == fo(x, u, t) + ~ Pdi(X, U, t) the usual Hamiltonian function

(Po = 1)
(b) u* maximizes H i.e. H(x*,p*, u*, t) ~ H(x*,p*, u, t). (11.5)
(c) all Transversality Conditions are satisfied. (11.6)
Proof. Pontryagin {1962} Ch. 2. Pontryagin's proof is lengthy and involved.
Rather than reproducing it here, we shall briefly show how it could be derived from
the Calculus of Variations.
Writing the Scrap function (S) as

S[x(T), T] == S[xo, 0] + 10
rt dtd S[x(t), t] dt. (11. 7)

Setting S[xo,O] = 0 and to = 0 for simplicity, and substituting it into (11.2) gives
the augmented functional J a (u)

Ja(u) = l F(x,x,p,u,t)dt (11.8)

where

F(x, x,p, u, t) == foO + p[f(·) - x]+ Sxx + St (11.9)

== H(x, U,p, t) - px + Sxx + St (11.10)
 247

where H(x,p, u, t) == fo(x, u, t)+p·f(x, u, t). (11.11)

The necessary conditions for an extremum of (11.8) is

(11.12)

The first term on the RHS of (11.12) is zero, being the Euler equation, (see eq. 8.7
and 8.8 of Ch. 8), i.e.

o = Fx - ! Fi: = Hx + iSxx + Sxt - ! (Sx - p)

= Hx + iSxx + Sxt - Sxt - xSxx + jJ = 0 i.e.
IjJ=-Hx·1 (11.13)
In the second and third term of (11.12), ou and op being arbitrary independent
variations, Fu = 0 = Fp i.e.
(11.14)
But Fp = f(·) - i = Hp - X, i.e.
(11.15)
Finally, the remaining terms of (11.12) must vanish for OJa(u) = o. But these are,
in terms of the Hamiltonian function H and "Scrap" function S defined in (11.11)
and (11.7) respectively,
Fi: = Sx - P
F - xFi: =H - px + Sxx + St - xSx + px = H(T) + St.
Thus, for oJa(u) = 0, the last 2 terms of (11.12) must also vanish, i.e.

[Sx - p(T)]ox(T) + [H(T) + StloT = O. (11.16)

If both the initial state x(O) and time to are also arbitrary and unspecified, (11.16)
becomes
(Sx - p)ox It=T
t=O + [ H () t=to = o.
t + St ] Ot It=T (11.17)
These are called the Transversality Conditions (c) of Theorem 11.1. Thus (11.13),
(11.14) and (11.15) are exactly Pontryagin's Theorem 11.1: (11.13) is the Euler
equations, (11.14) is (b) for the interior extremum case, and (11.17) covers all the
cases of (c).

The transversality conditions of equation (11.16), for given Xo and to, are summa-
rized in the following Table 11.1 to provide a handy reference for the determination
of the 2n boundary constants for the n-state vector x and n-costate vector p.
248

Table 11.1.
Transversality Conditions (S., = p(T))8x(T) + [H(T) + St]8T = 0, eq (11.16)
Case Substitution Boundary Condition Determination of
in eq. (11.6) equations Constants
A. Fixed Terminal Time T (8T = 0)
1. Fixed x(T) XT= =
8x(T) 0 x(O) = =
Xu; x(T) XT 2n equations to
8T=0 (No restrictions on p(T)) determine 2n constants
2. Free x(T) 8x(T) '" 0 x(O) Xu= 2n equations to
i.e. 8x(T) ::F 0 8T=0 p(T) = S., determine 2n constants
B. Free Tenrunal Time T (8T '" 0)
4. Fixed x(T) = XT 8x(T) = 0 x(O) = Xu 2n + 1 equations to
8T '" 0 x(T) = XT determine 2n constants
H(T) + St = 0 at t =T and terminal time T
5. Free x(T) 8x(T) '" 0 x(O) = Xu 2n + 1 equations to
8T '" 0 p(T) = S.,[x(T),T) determine 2n constants
H(T) + St = 0 at t =T andT

11.2.1. First Variations and Necessary Conditions

The first variations giving the necessary conditions are provided in Theorem
11.1 the derivation of which has just been presented. We shall now comment on the
meaning of these conditions one by one and their uses in practice.

1. x,p, E Rn are called state and co-state variables vectors respectively, and
U E U, a control vector.

2. If U = X, unbounded, the Maximum Principle and the Calculus of Variations

are exactly the same. However, u is more general: usually u E U where U
is a closed bounded subset of Rr. For example if Uj is the fraction of income
saved for investment, then clearly the control set U is U = {Uj : 0 :$ Uj :$ 1,
0:$ ~i Uj:$ 1}.

3. Condition (b) of Theorem 11.1 covers all possible cases of interior as well as
boundary extrema, of linear and nonlinear control. In the nonlinear interior
optimization case, Hu = 0 gives optimal u*. In the linear case, extremum
occurs at the boundary when U is bounded. Writing H(x,p, u, t) = 'I/J(x,p, t) +
O'(x,p, t)u where O'(x,p, t)u groups all the terms of H linear in U and 'I/J(x,p)
the remaining terms, we can see that aH/au = O'(x,p,t) and' if 0' > 0« 0),
H is linearly increasing (decreasing) in u and hence the choice of U max = b
(Umin = a) provides the highest H. When O'(t, x,p) changes sign, the choice
of optimal U switches from u = a to u = b or vice versa: thus O'(x,p, t) is
called the switching function and the linear control is called bang bang. (See
fig. 11.1). When 0' == 0 for some non-zero time interval, sgn 0' provides no
help: this is called Singular Control. The optimal control u* is then found by
 249

repeated time differentiation of u until u comes out explicitly, i.e.

dk
dt k u(x,p, t) =0 (k = 0,1,2, ... ) (11.18)

H H

L-.....L.._ _ _- ' -_ _ u L-.....L.._ _--':-_ _ _ u

a a

u~
I ~.
u

b r--___ u=b

a u=a
•••••••••••••••• !-o_ _ _ _ _-!
L -_ _ _ _ ~ _____ L-_~ _____t

Figure 11.1. Bang bang and singular control

All these cases are covered in Theorem 11.1 (b)

4. The co-state or adjoint variable p(t) is the generalized momentum discussed

in Ch. 8. It is the shadow price of:i; which measures the marginal contribution
of x(t) to the value of the programme (see Arrow & Kurz 1970 Ch. 2, or
Dorfman 1969). In optimal growth models with u(c) = c, the Hamiltonian is
H = c + pk = value of consumption (c) and investment (k) in terms of c, and
p = aHlak = contribution of k to H. In Resource Economics, p is the user
cost of resources, which is the cost of using up non renewable resources now
rather than later.

5. Once u* has been found and substituted into (11.3) and (11.4) we have a HDS
discussed in Ch. 8 with one exception: it is an optimal HDS. It requires 2n
boundary conditions to determine 2n constants of integration. These are the
transversality conditions required in Theorem 11.1 (c) and shown in (11.17).
Various combinations are possible. For example if Xo and T are fixed, (11.17)
gives p = S" which, together with xo, gives 2n conditions. When T = 00, this
is limHoo p(t)x(t) = 0 (See Arrow & Kurz 1970).
250

6. When the problem of maximizing J(u) in (11.2) subject to x = f(-) in (11.1)

has a further point constraint g(x, u, t) ~ 0 (for example 9 = y(t) -c(t) -i(t) ;?::
o which means consumption c(t) and investment i(t) cannot exceed national
income y(t)), then H becomes the augmented Ha defined as

Ha(p,x,u,t) == foO +pf(·) + Ag(·) (l1.1D)

where A is the Lagrange multiplier obeying Kuhn-TUcker conditions Ai ;?:: 0,

gi(') ~ 0 and Aigi(') = O. Pontryagin's Theorem 11.1 is then unchanged except
that H is replaced by Ha (·) and the Ai ;?:: 0, Aigi(') = 0 for all i, conditions are
added to (11.13), (11.14) and (11.15), namely

gi ~ 0, Ai;?:: 0, Aigi(') = 0 Vi (11.20)

Example 11.1. Minimize fl' ~u2(t) dt given

Xl = X2(t), XI(O) = 0
X2 = u(t), X2(0) = 0

Case (i): T = 1, x(T) = (2,3)

Case (ii): T = 1, x(T) unspecified but S[x(T)] = ~[XI (T) - 2]2

Solution. The Hamiltonian is H = ~u2 + PIX2 + P2U

Hu = 0 = f.L + P2 => u* = -P2(t)
PI = -HXI = 0 => pi(t) = CI (constant)
Pz = -HX2 = -PI = -CI => pi(t) = -CIt + C2
. = u*( t ) = -P2 (t ) = CIt - C2 => X2*(t ) = 2'c
X2 1 lt2 - C2t + C3
.
Xl
1 3 -"2t
= X2 => Xl*( t ) = GClt C2 2
+ C3 t + C4
where CI, C2, C3, C4 are arbitrary constants to be determined by (11.16), Table 11.1.
Since XI(O) = 0 = X2(0), C3 = 0 = C4' For CI and C2, we have
Case (i):
_
x(T) - (2,3) =>
lr -1- = 2 = xI(l) }
£1. _ _ 3_
_
(1)
_
=> CI - -6 - C2·
2 - C2 - - C2

This gives X2(t) = -3t2 + 6t, XI(t) = -t3 + 3t2, u(t) = -P2(t) = 6(1- t).
Case (ii):

PI(T) = SXI = xI(1) - 2 = CI

3
P2(T) = SX2 = 0 => -CI + C2 = 0 => Cl = C2 = -2'
This gives XI(t) = -it3 + ~t2, X2(t) = _~t2 + ~t, u(t) = H1 - t).
Example 11.2. (Pontriagin 1962 p. 23). Given Ii = u, lui ~ 1, find the control
law to bring the system from Xo to (0,0) in the shortest time.
 251

Solution.. Define Xl = X2, X2 = U to transform x= u to X = Ax + bu where

A = (~ ~), b = ( ~ ), u E R, and minimize Il'dt subject to X = Ax + bu. The
Hamiltonian is H = -1 + p'(Ax + bu) = -1 + PIX2 + P2U. The solution, by Theorem
11.1, is

ih = -H~l = 0 =? PI(t) = CI
'h = -H~l = 0 = -PI(t) = -CI =? P2(t) = -CIt + C2

H(x,p, u) being linear in u, and lui ~ 1, the switching function is aCt) == P2(t) =
-cIt + C2 which cannot vanish identically in any nonzero time interval, for this
would imply CI = 0 = C2 i.e. PI = 0 = P2 and H = -1 which would contradict the
transversality requirement that H(T) = 0, T being unspecified, and H(x,p, u) being
autonomous, H = 0 'Vt E [0,1]. Singular control, for which a(t) == 0 for some tEl
(J nonzero interval), is thus ruled out leaving bang bang control, where u = +1 or
-1, as the only possibilities. \Vith u = ±1, we have

l.e.

1
Xl(t) = 2x~ + C5 for u= 1 and

XI(t) =-~x~+csforu=-I, Ci (i=I,2, ... ,G)

are arbitrary constants. See phase diagram fig. 11.2.

Zl

Figure 11.2. Phase diagram for x = u (or Xl and X2)

252

By the switching theorem (see Tu 1984 p. 197) there is at most one switching
from u = 1 to u = -1 as (T(t) == P2(t) changes sign. It can be seen that if x(O) is on
the curve AOD (u = 1 on OA, u = -1 on OD), no switching takes place. Starting
from anywhere else not on AOD, the system needs one s\\itching to go to the origin.
As a physical example, we can think of x(t) as the distance at t of a spacecraft
from the origin, x as its speed and !i = u as its acceleration, treated as a control
variable to drive the spacecraft home as quickly as possible. As an economic example,
x(t) may represent foreign indebtedness, x, debt accumulation or discharge rate and
!i = u = speeding up or slowing down of this rate, the capacity of this acceleration
or deceleration being bounded by the country's international credibility, economic
viability and political feasibility, i.e. lui ~ 1. The ultimate destination is obviously
Xl (T) = 0 = x2(T) i.e. x(T) = 0 = x(T) where the country is free from all
indebtedness.

11.2.2. Second Variations and Sufficient Conditions

The second variations can be studied by examining the total variations of Ja(u)
in (11.8) around u* :

(11.21)

Neglecting o(u2 ) and the scrap function S in (11.7), we have

~Ja(u) ~ ~210t (ox,ou) (HH:r::r::r:u HH:r:u) (

uu
~x
uU
) dt. (11.22)

It is easy to see that the matrix in (11.22) must be negative semidefinite for a
maximum and positive semidefinite for a minimum. Note also that Huu is also
negative semidefinite for a maximum and positive semidefinite for a minimum, which
is the Legendre-Clebsch condition. (Fbr further details and proofs, see I'll 1984
p. 136).

An Important Particular Case of Sufficient Conditions

In the particular case in which lo(x, u, t) and I(x, u, t) in (11.1) .and (11.2) and
hence H(x,p, u) == 100 + p. 1(·) are concave (convex) in X and u for given p, the
Necessary conditions (11.13), (11.14) and (11.15) of Theorem 11.1 are also sufficient
conditions. This assurance is very useful in practice since it will dispense us of the
search for sufficient conditions. Fbrtunately (for economists), most applied Eco-
nomics problems fall into this category. In Optimal economic growth, for example,
100 is the utility function which is concave by nature, 10 = !p(k(t)) - Ak(t) where
!p(k) is the production function, concave by nature and Ak(t) is a linear function
 253

(A = constant) and thus f(-} is concave in k(t) and hence H(k,p, u) == lo{-} + pl(·)
is concave.
The proof, provided by Seierstad and Sydsaeter (1977), consists of a string of
inequalities

~J4(U) = l [(H* - PI*) - (H - pI)] dt

= l[(H*-H-P(x*-X)]dt
= l[(H* - H + p(x* - x)] dt

= l[(H* - H - H;(x* - x)] dt (11.23)

~ 0 for concave H(.)
~ 0 for convex H(·)
where the third equality was obtained by integration by parts, the fourth, by using
the necessary conditionp = -H; in (11.13). Note that (u-u*)H~ = 0 since H~ = 0,
is not shown above.

Example 11.3. Consider the optimal economic growth model examined in Exam-
ple 8.2 where H == u(c) + q[J(k) - Ak - c] and H* == u* + q(f* - Ak* - CO) where
u* == u(c*), f* == f(k*). Application of (11.23) gives

~J4 == l [u* + q(f* - Ak* - c*) - u - q(f - Ak - c) - q(f' - A)(k* - k)] elt

= l {u* - u - q(c - CO) + q[f* - f - (k* - k)J'(k*)]} dt

= l {u* - u - (c* - c)u'(c*) + q[f* - 1 - (k* - k)J'(k*)]} dt

~O.

Thus necessary condi tions also ensure sufficient condi tions since H (.) is concave in
c and k.

11.3 Stabilization Control Models

An important type of problem consists in stabilizing the system by keeping it as

close to some desired path as much as possible. More precisely, given the system

I = A(t)x(t) + B(t)u(t) (11.24)

where x ERn, u ERr, (r ~ n), the objective is to devise some optimal control u'
such as to minimize
11fT
J = '2 x (T), Sx(T) + '210 (x'Qx + u' Ru) dt (11.25)
254

for the Linear Regulator (' denotes transposition), and

1 r
'21h (T),Sh(T) + '210
T
J = (h'Qh + u'Ru) dt (11.26)

for the Linear Tracking problem (see Athans and Falb 1966, or Tu 1984), where CJ
and R are positive definite matrices, h(t) == x(t)-x(t) = deviation of x(t) ERn from
some desired level x(t). A translation of x to the origin, x = 0, \vould reduce the
tracking to the Regulator problem, hence we shall only discuss the Linear Regulator.
The Hamiltonian His

H= ~(x'Qx + u'Ru) + p'Ax + p' Bu. (11.27)

Theorem 11.1 gives

Hu=Ru+B'p=O or u*=-R-1B'p (11.28)

x= Hp = Ax + Bu* = Ax - BR-1B'p
-Hz = P = -Qx - A'p with p(T) = Sx(T) by (11.16) i.e.

(11.29)

whose solution, taking the Transversality condition p(T) = Sx(T) into account, (for
details, see Tu 1984 ch. 8) is
p(t) = K(t)x(t) (11.30)
where K(t) is part of the inverse of the transition matrix of (11.29). Substitution
into (11.28) gives the feedback control law

u*(t) = -R-1B'Kx(t) (11.31)

where - R- 1 B' K is often referred to as the Kalman matrix. Substitution into (11.24)
gives
x = (A - BR- 1B' K)x. (11.32)
Differentiating p = Kx and substituting from (11.32) yield

p = Kx+ K± = [K + K(A- BR-1B'K)]x (11.33)

nut (11.29) and (11.30) give, on the other hand,

p = -(Q + A' K)x. (11.34)

Equating (11.33) with (11.34) gives

[K + KA+ A'K - KBR-1B'K + Q]x(t) = o. (11.35)

Since (11.35) holds for all arbitrary choice of xo, and K(t) does not depend upon
xo, the matrix in (11.35) must vanish i.e. K must satisfy the Riccati equation
K = -KA-A'K +KBR-1B'K-Q (11.36)
 255

with boundary conditions given by p(T) = Sx(T) and (11.30), as

K(T) = S. (11.37)

It is easy to verify that (11.31) is the minimizer of H, since

[ Hxx Hxu] _
Hux Huu -
[Q0 0] .
R (11.38)

The results obtained can be summarized as follows.

Theorem 11.2. Given system {11.24} and the functional {11.25} where u(t) is un-
bounded, T specified and S, Q are positive semi-definite, R positive definite, there
exists a unique optimal feedback control u* = _R- 1B' K x(t) where K(t) is the unique
solution of the Riccati equation {11.36} satisfying the boundary conditions {11.37}.

Example 11.4. Stabilization of national debt. National debt x(t) accumulates by

ax(t) due to interest charges and fresh borrowing u (> 0) or repayment u (u < 0),
I.e.
:i; = ax(t) + u(t); x(O) = xo.
The objective functional is to minimize

where q, r > O. In this case, S = 0, A = a, B = b = 1, Q = q and R = r, and the

Hamiltonian is
1
H = 2(qx 2 + ru 2 ) + pax + pu

Hu = 0 gives u* = -~ = - (~) x(t) from (11.30). k being constant, (11.36) gives

k2 - 2rak - rq = 0

whose solution is

k = ar ± rJa 2 r + 1jr, putting (3 == Ja 2 r'+ qjr,

k = (a + (3)r.

The optimal policy is

u*(t) = -(a + (3)x(t)
:i; = ax(t) = u(t) = -(3x(t).
The solution gives the optimal repayment policy u*(t) = -(a + (3)xoe- f3t with the
resulting debt decreasing at rate (3 over time, i.e. x* (t) = xoe-f3 t .
256

11.4. Some Economic Applications.

1. Intergenerational Distribution of Non-renewable Resources

Given a fixed stock (8) of some non-renewable resource such as oil and gas,
assumed known with certainty, the intergenerational distribution problem is what
quantity q(t) of 8 should be consumed by the current generation and how much
should be saved for the future, knowing that future generations having no voice,
no vote, have to depend on us for their fair share. Given the usual assumption of
concave increasing utility u( q) where u" (q) < 0 < u' (q), the objective is to maximize

loT u( q)e- ot dt
subject to the isoperimetric constraint

loT q(t) dt = 8.
Defining x(t) == 8 - fci q(r) dr as the remaining stock at time t, with x(O) = 8 and
x(T) = 0, we have
± = -q(t)
ot
H = u(q)e- - p(t)q(t) where fJ is the usual rate of future discount. Theorem 11.1
gives
Hq= e-otu'(q) - p(t) = 0
p = -Hz = 0 ::} p(t) = p, some constant.
This implies p(t) = P = e-otu'(q) or u'(q) = peot i.e. marginal utility u'(q) increases
at an exponential rate. In view of the law of diminishing marginal utility u" < 0 < u'
with liIDq--+o u'(q) = 00, this means the optimal quantity q*(t) of non-renewable
resource consumed at t must decrease exponentially over time. In other words, if
fJ > 0, current generations should consume more than future generations. If fJ = 0,
p = u'(q) i.e. marginal utility is constant: all generations receive equal treatment:
each should consume the same quantity q.

2. Optimal Harvesting of Renewable Resources.

Consider a fish population x(t) as an example of reproducible resources. Its

growth f(x) is decreased by harvesting h(t), 0 ~ h(t) ~ hmax , i.e.

±(t) = f(x) - h(t).

It is reasonable to expect that f(O) = 0 = f(K), f(x) > 0 \::Ix (0, K) and f(x) <
o \::Ix > K, and also f"(x) < 0 i.e. f(x) is concave with some saturation level K
 257

above which overcrowding will cause a negative growth rate. The logistic curve is
an illustration of this. The objective is to maximize the profit functional of a typical
fisherman who considers fish as common property, i.e. subject to :i; = f(x) - h

MaxJ = 1000
e- 6t [p - c(x)]h(t) dt

where 8 is the usual future discount rate, p = fish price, c(x) = unit cost of harvest-
ing, d(x) < o.
The Hamiltonian is
H = e- 6t [p - c(x)]h(t) + A(t)[f(x) - h(t)]
== a(t)h(t) + e- 6t A(t)f(x)
where a(t) == e- 6t [p - c(x) - A(t)], the switching function. Theorem 11.1 gives
:i; = f(x) = h*(t) = H>.
.x = e- 6t hd(x) - Af'(x) = -Hz
where h* = hmax if a(t) > 0, h* = 0 if a(t) < 0 and if a(t) == 0 for some nonzero
time interval, singular control takes place. In this case
a(t) == 0 ~ A(t) = p - c(x)
a(t) == 0 = _e- 6t [(p - c)8 + d(x):i;] = .x = O.
Substituting:i; and .x in the above, and dividing by e-6t (p - c) gives the well known
equilibrium relation in Capital theory (see Clark 1976)

J'(x)- df(x) =8
p - c(x)
which says that the marginal productivity f'(x) of the fish population net of the
stock effect df(x)/(P - c(x)) must be equal to the social discount rate 8. If cost
is stock invariant, i.e. d(x) = 0, this gives the well known rule that the marginal
product of capital is equal to the rate of future discount which is brought into
equality with the rate of interest in equilibrium. If a(t) > 0, u*(t) = U max and if
a(t) < 0, u* = Umin = O. This is the bang bang control solution.

3. Multiplier-Accelerator Stabilization Model.

Consider the Samuelson (1939)-Hicks (1950) type of multiplier accelerator model,

cast in this framework by Turnovsky (1981).
I(t) = vY + G
S(t) = sY(t)
Y(t) = h[I(t) - S(t)]
s 1
= -1 - v Y(t) + 1 _ v G(t)
or y(t) = ay(t) + bg(t).
258

The objective is to minimize

J = -11
2 0
00
(qy2 + rl)dt
where I(t) = total investment demand, composed of private induced investment vY
(v = constant accelerator) and government investment G. S = total saving, Y =
GNP, y(t) == Y(t) - Y*, g(t) == G(t) - G* where Y*, G* are optimal full employment
GNP and government expenditure, a == -8/(1 - v), b == 1/(1 - v), q, r = positive
constant weights.
The Hamiltonian is H = t(qy2 + rg2) + p(ay + bg), Hg = 0 =} 9 = -(~)p =
-~(ky + v) where limt-+oo k(t) = Te, some constant. Equation (11.36) gives

or
k = (r/b 2)(a + ja 2 + qb 2/r).
This is almost exactly like Example 11.4. The final solution is if = ay + bg* =
(a - b2k/r)y == my where m == a - b2k/r = -(8 + q/r)1/2/(1 - V)2 < 0, and
y*(t) = yoe mt , i.e. Y(t) --+ y* as t --+ 00 as required. For further details, see Tu
(1984 ch. 8).

4. Optimal Economic Growth (OEG).

Optimal economic growth theory is perhaps the most important economic

application of Pontriagin's Maximum Principle. We have encountered it in Ch.
8 Example 8.5 where it was used to establish the parallel between the Lagrangean
and Hamiltonian Dynamical Systems, again in section 8.4.2 where it was used to
discuss the theory of Perturbed Hamiltonian Dynamical systems, and just above,
in Example 11.3 where it was used to illustrate the sufficient conditions. In this
section, we wish to show, in the context of economic application, how OEG can be
formulated and solved as a typical optimal control problem, with the bang bang
solution as a particular case.
As in Example 8.5, the problem of maximizing Jl'
u(c)e- St subject to c = f(k)-
)..k - k gives rise to the Hamiltonian H = e-St{u(c) + q[J(k) - )"k - c]}, with
f" < 0 < f' and u" < 0 < u', is a typical optimal control model which is reduced to
solving the system

k = Hq = f(k) - )..k - c, k(O) = ko

q = oq - Hk = -[J'(k) - ).. - o]q, T-+oo
lim e- ST q(T)k(T) = 0
He = 0 =} u'(c) - q = 0 =} u"c - q = 0
1 cu"
=} c= - () [J'(k) -
O"C
().. + 8)]c where O"(c) == - ~
-.
 259

Ak
f (k)

~--~~~_________________k

: f(k)-Ak

~--~--~--------~~-----k
o k*
Figure 11.3. Phase plane of the OEG path

The solution is summarized in fig. 11.3 in the c - k space where it is easy to see
that c ; 0 if f'(k) ; A + 8 and k ; 0 if c ~ f(k) - H and that equilibrium (c*, k*)
< < < >
is a saddle point since the Jacobian J(c*, k*) = (~1 ~) where 0: == c.!;:~.) < 0
with eigenvalues !(8 ± .../8 2 - 40:) both real and of opposite signs.
In the interesting particular case of linear utility functions u( c) = c, H = e- c5t { c+
q[J(k) - H - cn is linear in the control c and 0 ~ c ~ Crnax where Crnax = f(k*),
the switching function u(t) == e- c5t (1 - q) gives the solution of the bang bang type:
c* = 0 if q > 1, c* = f(k*) if q < 1 and the singular type if u(t) == 0 i.e. q(t) == 1 for
some nonzero time interval and c* E (O,j(k*)). The Hamiltonian flow is

k=f(k)-H-c
q = -[f'(k) - (A + 8)]q
which gives the saddle point equilibrium at (c*, q*) = [f(k*) - H*, 1] (see fig. 11.4).
It is easy to see that q = 0 separates the region offalling q, to the left of k*, from the
region of rising q, to the right of k*. Similarly, the line q = 1 delineates the region
of falling k, below it from the region of rising k, above it (see fig. 11.4). Again,
the equilibrium (k*, 1) is a saddle point: paths on the stable arms approach (k*, 1)
asymptotically, any other paths not starting on the stable arms diverge from (k*, 1)
as can be seen in fig. 11.4.
It should be noted that the above analysis of the neoclassical growth model,
formulated as an optimal control problem for the first time by Cass (1965), has
been exhaustively developed and extensively applied to many areas of economic
theory.
 Ak
260
f(k)

f(k)-Ak

k
k* k:
L
q

~
k=D ~

1
~

~
~~-----------L-- ________ ~k
o k* k
Figure 11.4. Bang bang-singular solution of OEG model

11.5 Asymptotic Stability of

Optimal Dynamical Systems (ODS)

The stability of ODS is the stability of the HDS which was examined in some
details in Ch. 8 and also in Tu (1991 Ch. 12). Since stability varies from one problem
to another, we shall confine our analysis to the Optimal Economic Growth (OEG)
problem encountered in Ch. 8.
It will be recalled that application of Pontryagin's Maximum Principle to the
OEG problem leads to the following HDS
k= Hq
q= -Hk + tSq(t) (11.39)
where H :: e- ot { u(c) + q[f(k) - '\k(t) - c(t)}.
Linearizing about the equilibrium (k*, q*) at which Hq = 0 = -Hk + tSq(t) and
setting it at the origin for simplicity, leads to :i; = Mox in (8.26), i.e. in full, with
X:: (k,q),

(11.40)

where

and
A

Mo
B]
= [AC -A' ,Mo
[AC -A'
B] = Mo ·A

(11.41)
A ::A-~In' A:: Hqk , B::Hqq, C::-Hkk
 261

where A, B, Care (n x n) real matrices, A being symmetric and B, C, being both

positive definite (written as B > 0, C > 0) in view of the assumption of concavity
of H in k and convexity in q and finally' denotes transposition.
It was shown in Theorem (8.7) that in the undiscounted case (8 = 0) of one
degree of freedom (n = 1), Mo = ( ac -ab ) has 2 real eigenvalues of opposite signs,
>. = ±Ja2 + bc. Will this result hold for any n > I? This is answered by Theorem
11.3

Theorem 11.3. (Lancaster 1991). If A, B, C are real (n x n) matrices with

B > 0, C > 0, system x = Mox has SPP (Saddle Point Properties) i.e. Mo has n
eigenvalues in both the open left and right half complex plane and no eigenvalues on
the imaginary axis.

Proof. Lancaster (1991) first shows the equivalence of >.J - Mo and 1$ K(>') by
Schur decomposition as follows

where
K(>.) == (>.J + A')B- 1 (>'I - A) - C. (11.43)
Being equivalent, (>.J - Mo) and 1$ K(>') have the same eigenvalues with the same
multiplicity structure. The eigenvalues of K(>.) are the zeros of det K(>'). Now
define
L(>') == (5.1 - iA)* B- 1 (>.J - iA) + C (11.44)
where * denotes conjugate transposition, i.e. the eigenparameter of L(>') is obtained
from that of K(>.) (and hence of Mo) by rotation through a right angle. Furthermore,
for>. E R, L(>'*) = L(>') and B > 0, C > 0 imply L(>.) > 0 for all >. E R
and all matrices A. Hence L(>') has no real eigenvalues, in other words, Mo has
no pure imaginary eigenvalues. Furthermore, the eigenvalues of Mo and hence of
K(>.) and L(>.) have the double symmetry discussed in Theorem 8.6. Hence Mo has
SPP. (QED)

The next question is whether with the introduction of a positive discount rate
8, considered as a perturbation, this SPP will still be maintained? This has been
answered by Kurz (1968) in Theorem 8.8: it will, so long as the real parts of the
eigenvalues of M6 do not lie within the distance 8/2 from the imaginary axis. We
shall only add one latest result by Lancaster.

Theorem 11.4. (Lancaster 1991). If A, B, C are real matrices with B > 0,

C > 0 (read positive definite), and if

(11.45)

where, == >'m(BC) == minimum eigenvalue of BC, then M6 in (11.40) has the

SPP.
262

Proof. (Lancaster 1991). From (11.41) it can be seen that M6 is a Hamiltonian

matrix and by Theorem 11.3, has the SPP, and the eigenvalues of M6 are only
those of M6 shifted through fJ/2. Thus, by Theorem 8.8, M6 has SPP iff M6 has no
eigenvalues within the distance fJ /2 of the imaginary axis, or equivalently iff

has no eigenvalues within the distance fJ /2 of the real axis. A straightforward cal-
culation with the discriminant functional for £(A) gives the results. (QED)

Note that Lancaster's condition fJ2 < 4')' in (11.45) is less restrictive than the
Rockafellar's curvature condition" fJ2 < 4 aj3 where a and j3 are respectively the
minimum eigenvalues of C and B, i.e. fJ2 < 4aj3 ~ 4')'. For example, if B =
(~ 1~2) and C = (1&2 ~) , then aj3 = 1/4 < 1 = ')'. Will the system :i; =
M6X be globally asymptotically stable (GAS)? We shall first introduce Lancaster's
Lemma, before proving GAS (Global asymptotic stability).

Lemma. (Lancaster 1991). Let the "curvature matrix" Q be defined as

Q=
-
[B
§.I
~CIn ] (11.46)
2 n

then fJ2 < 4')' iff Q is positive definite (written as Q > 0).

Proof.

[ §.BI ~ I ] = [ BI/2 0 ] [ I 0 ] [BI/2 %BI/2 ]

2.
C - §.
2
B- l / 2 I 0 C - e B- 1 4
0 I

i.e. Q and I EB (C - ~ B- 1 ) are congruent and thus if either one is positive definite,
so is the other, i.e. Q > 0 ¢} S > 0 where S == I EB (C - ~B-I) :
fJ2
S> 0 ¢} C - "4B-l >0
¢} Bl/2(C _ fJ2 B- l )B I / 2 > 0
4
¢} Bl/2CBI/2 _ fJ2 I> 0
4
¢} Am(BI/2CBI/2) > fJ2 (since Bl/2(BI/2CBI/2)BI/2 = BC)
4

i.e. Am(BC) == ')' >~. (QED)

Note that Brock and Sheinkman (1976 pp. 169-170) proved that fJ2 < 4aj3 => Q > O.
Lancaster's Lemma is stronger and proves also the converse.
We can now prove GAS.

Theorem 11.5. The Perturbed Hamiltonian Dynamic System (PHDS) :i; = Max
in (11.40) is GAS provided fJ2 < 4')'.
 263

Proof. Following Brock (1977), let us choose the Liapunov function V == -ilk > O.
(For details on the positivity of V, see Brock (1977). Differentiation gives

V = -ij'k - i/k.
Substituting, from the OSS (11.39), k = Bq + Ak and ij = ck + (JI - A}q, gives ('
denotes transposition)

V = -[Ck + (JI - A}ql'k - i/(Bq + Ak)

= -k'ck + i/(JI - A/}k - i/ Bq - i/ Ak (A symmetric)
(QED)
~ I ~CI ] [ k
= - (q,. k')' [B q ] -= -x"Q x < 0 .

11.6. Structural Stability of Optimal Dynamical Systems

In the last section, and also in Chapter 8, we have discussed the SPP of optimal
HDS. We have shown that the conservative HDS have the double symmetry prop-
erties which the PHDS - typical in Economics - do not possess, and conditions
sufficient for PHDS to preserve SPP have been investigated. This might have left
us with the impression that a solution path which fails to converge to the optimal
stationary state (OSS) should be rejected as non-optimal. However, it has been
shown recently that an optimal path need not converge to OSS nor have the SPP: it
may bifurcate into periodic orbits and yet remains optimal in that it fulfills all the
optimality requirements including transversality conditions. More recently, another
type of stability loss causing chaotic dynamical paths in Optimal Economic Control
(OEC) models has also been investigated. Since these are advanced areas which,
furthermore, are not yet fully developed, we shall briefly discuss the Hopf bifurcation
in OEC models, first in the PHDS with two degrees of freedom (n = 2) which is the
simplest case in which Hopf bifurcation can arise, then in the multisectional models
(n > 2). Finally we shall briefly mention the possibility of chaotic solutions in OEe
models.

11.6.1. Hopf Bifurcation in DEC Models

and Optimal Limit Cycles

It will be recalled, from Chapter 9, that Hopf bifurcation occurs when a pair of
complex eigenvalues .\(6) = 0(6} ± ijJ(6} depending continuously on some parameter
6, crosses the imaginary axis, for some value 6*, at nonzero speed, i.e. 0(6*} = 0 ¥
80(6*}/86 and jJ # o. By convention, 80(6*}/86 > 0 i.e. the crossing is from the
264

left. Then for 8 < 8*, the origin (which is chosen as a critical point) is a stable focus
and for 8* < 8, it is an unstable focus surrounded by a stable limit cycle whose size
increases with 8.

Two-State-Variable Models.

Let us first consider a PHDS with two degrees offreedom investigated by Dockner
(1985) and discussed in Chapter 8, equation (8.29) to (8.31). The model has 2 state
variables (x, y) and two co-state variables (A, /l). Putting z == (x, y, A, /l), we have, as
in equations (8.29), (8.30) or (11.40) and (11.41), a PHDS depending continuously
on one parameter 8, the rate of future discount, as follows

(11.47)

where Mo == Mo + ~ 14 with all notations as before. Let A, /l be respectively, the

eigenvalues of Mo and Mo, and let /l(8) = ±0:(8) ± ifJ(8). As 8 increases, let -0:(8)
move to the right until they hit the imaginary at some 8* where 0:(8*) = 0 '" fJ(8*)
and do:(8*)/88 > O. Then Hopf bifurcation occurs which gives birth to a periodic
cycle. This value could be computed explicitly, as has been carried out by Dockner
(1985). Let the characteristic equation c(A) of Mo in (11.47) be (see eq. 8.31)

(11.48)

where Ci = sum of principal minors of Mo of order i (i = 1,2,3,4), i.e. Cl = tr (Mo),

C4 = det(Mo). The solution of (11.48) is

8
A=-+/l (11.49)
2
where
8)2 K 1
V
/l2 = ( 2 - '2 ± 2 K2 - 4C4 (11.50)

and K == C2 - 82 • For the existence of pure imaginary eigenvalues, which is necessary

for Hopfbifurcation to arise, clearly we must have K2-4c4 < 0, and also Re (A) = O.
By simple calculations, Dockner et al. (1991) have shown that the bifurcation curve
IS

( ~) 2 + 82 K~*) _ c4(8*) = 0 (11.51)

or
c2(8*) = ±V84 + 4C4
obtained by solving k 2 + 82 k - C4 = 0 in (11.51) where k == K/2 and using the
definition K == C2 - 82 . Note that c2(8*) is a real number since c4(8*) = n1 Ai =
(-ifJ)( ifJ) (0: + ifJ) (0: - ifJ) = fJ2( 0:2 + fJ2) > 0, and fJ is the same for all 4 eigenvalues.
The results of this analysis have been applied to a variety of problems such
as Palar's production and marketing model (Dockner, Feichtinger and Novak 1991),
 265

capital accumulation, endogenous population growth and Easterlin cycles

(Feichtinger and Dockner 1990) optimal periodic production cycles (Feichtinger &
Sorger 1986, Wirl1991) cyclical consumption patterns and rational addiction (Dock-
ner and Feichtinger, undated). We cannot go into these here, for lack of space.

Multisectoral OEG Models.

The occurrence of Hopf bifurcation in multisectoral models - of which the two-

sector one discussed in the last section is a miniature - has been investigated by
Benhabib and Nishimura (1979, 1981). Their pioneering papers are reduced to a
PHDS of (8.26) or (11.40)
X=M6 X
where x == (k l k2 , ••• , kn' ql, ... , qn), ki being a state, and qi, a co-state variable,
(i = 1,2, ... , n). The authors studied the bifurcation of closed orbits from the
steady state equilibrium by literally applying the Hopf bifurcation theorem dis-
cussed in the last section, and also in Chapter 8. They concluded that as a pair
of complex eigenvalue >.(8) = 0'(8) ± if3(8) depending continuously on the discount
parameter 8, crosses the imaginary axis at nonzero speed for some critical level 8*,
i.e. 0'(8*) = 0 '# 80'(8*)/88 and f3(8*) '# 0, then [k(t, 8*), q(t, 8*)] is a closed orbit
in the positive orthant, of period 21l'/1f3(8*) I. In other words, let x = M6X(X E R2n)
have n eigenvalues in the open left half plane and n in the open right half complex
plane, and let one pair of complex eigenvalues, moving from the left, land on the
imaginary axis, leaving behind n - 2 eigenvalues on the left and n on the right half
plane. Then a limit cycle is born. The authors give a numerical example in which
8* = 0.248 is shown to be that critical value giving rise to limit cycles.
Medio (1987a, 1987b) generalized Benhabib and Nishimura's model and studied
the birth of limit cycles given by Hopf bifurcation, in the framework of Lambda
matrices and gyroscopic models. His model is reduced to x = M6X as before, or in
full,

k = Ak+Bq (11.52)
q = Ck - A'q
where A == A = ~ In; A, B, C are real (n x n) matrices and B, C are both symmetric
positive definite matrices, with notations as in (11.41) above.
Taking Laplace transforms (with zero initial conditions, see Chapter 4) gives

>.k = Ak+Bq (11.53)

(AI + A')q = ck.

Solving the second equation of (11.53), q = (AI + A,)-lCk and substituting into the
first equation, gives
266

Multiplying through by ()"I + A')B- l gives

)"(>.I + A')B- l k = (>.I + A')B- l Ak + ck

[)..2 B- 1 + )..(..1' B- 1 - B- 1 A) - (A' B- 1 ..1+ C)]k = 0
I.e.
L()..)k == (M)..2 + G)" - N)k = 0 (11.54)
whose inverse transform (with k(O) = k(O) = 0), is

Mk+Gk-Nk = 0 (11.55)

where M == B- 1 , G == A'B- l - B- I A = -G' (skew symmetric) and N == C +

A' B- 1 A. Note that M and N are symmetric positive definite matrices.
This is a quadratic eigenvalue problem of a gyroscopic system. Clearly the 2n
eigenvalues of the lambda matrix L()") in (11.44) are the eigenvalues of JVh The
solution of (11.55) is of the form k(t) = ve>.l i.e.

L()..)v = 0 (11.56)

where ).., v are respectively eigenvalues and eigenvectors of the Lambda matrix L()..),
(See Lancaster 1966 for )..-matrices) in (11.56) where L()") == M)..2 + G)" - N as
defined in (11.54).
Premultiplying (11.56) by v (conjugate of v) gives

m)..2 + ig).. - n = 0 (11.57)

whose solution is
).. = _1 (-ig ± }_g2 + 4mn) (11.58)
2m
where m == v'Mv, n == v' Nv and ig == v'Gv. Further analysis (for details see Medio
1987b pp. 417-419) shows that the relevant discriminant (11.58) for stability study
IS
(11.59)
where nl == n - mJ2 / 4. Medio showed that the necessary and sufficient conditions
for system :i; = MdX to have local SPP is that ~(J) > o. If ~(J) < 0, no SPP exist
and if there exists some value J* such that ~W) = 0 and ~(J) ~ 0 if J ~ J* and
d~(J*)/8J < 0 (i.e. ~(J) is a decreasing function of J, vanishing at J = J*) then as
J is increased past J*, the system will undergo a bifurcation and lose its SPP. Two
subcases arise
(i) g(J) = 0 for J E N.(J*), some eigenvalue lying on the real axis, crosses the
imaginary axis from left to right, causing "total instability";
(ii) g(J*) i 0 : the loss of stability is of the "flutter" type: a pair of complex conju-
gate eigenvalues crosses the imaginary axis from the left, causing a Hopf bifurcation
and giving birth to closed orbits around the equilibrium point.
Note that this limit cycle is optimal in that it fulfills all optimality requirements,
including the transversality limHoo q(t)e-dlk(t) = 0 conditions. Thus an economy
 267

satisfying all the standard neo-classical competitive conditions such as perfect fore-
sight, zero profit, market clearing, can exhibit permanent oscillations in prices and
capital stocks. This is the concept of optimal economic fluctuations.

11.6.2. Chaos in Optimal Dynamical Systems (ODS)

Recent research interest in nonlinear dynamical systems has been shifted to HDS
and shown the possiblity of chaos in this area.
We have been introduced to chaos in Chapter 9 especially in discrete ODS.
In continuous ODS, the emergence of chaos - which necessitates a torus of at
least three dimensions - is due to the presence of strange attractors and thus,
the investigation of chaotic motion in continuous ODS amounts to establishing the
existence of a strange attractor. It will be recalled that an attractor is a closed
invariant set A which attracts all orbits with initial states in its neighbourhood U
i.e. the flow gtu ~ A as t ~ 00, and a strange (or chaotic) attractor is the one which
contains a transversal homoclinic orbit (see for example, Guckenheimer and Holmes
1983). Strange attractors are highly sensitive to initial conditions: two neighbouring
starting points can lead to exponentially divergent paths.
The existence of chaos in discrete OEC (Optimal economic control) models has
been investigated by Boldrin and Montrucchio (1986), Deneckere and Pelican (1986),
Montrucchio (1986) among others and in continuous OEC models by Benhabib and
Nishimura (1979), Benhabib and Day (1981) and Lorenz (1988). The lack of space
on the one hand, and the advanced nature of work in this area, on the other, do
not allow us to go into these here. Rather we shall show the possibility in ODS
with reference to Lorenz's (1988) work on a decentralized OEC model, because it
is carried out in the framework of continuous HDS, in the spirit of Benhabib and
Day (1981), Benhabib and Nishimura (1979) and Medio's (1987) models which were
analyzed in the last section, in connection with the Hopf bifurcation and the ensuing
optimal limit cycles.
Lorenz shows that if some agent h's(h = 1,2, ... ,r)H DS, having a periodic orbit
caused by Hopf bifurcation, is perturbed by the action of other agents, then chaos
can arise.
Starting with the conventional OEG model, we have

± = H).. = f(X,A) (11.60)

~ = JA - Hx = g(x, A)

where H = max u H(x, A, u, t) where u is a control vector and (x, A) are n-state and
co-state vectors. Suppose (11.45) could be separated into r subsystems for each of
the 1" agents, we have for each h

±h = fh(x\ Ah) (11.61)

~h = l(x\ Ah).
268

Now if these are also functions of other agents' actions as well, (11.60) becomes

±h = jh(Xh,Ah,X, X) (11.62)
~h = gh(Xh,Ah,X,X)

h
were x- -= (x 1 , ... , x h-1 , x h+1 , ... , x r)., /,I =
- (\1 \h-1 , /I\h+1 , . . . , /I\r)'1.e. (-x, /I') are
/I , . . . , /I

(x, A) without elements (xh, Ah) i.e. (x, X) are the state and co-state vectors of other
agents.
The current valued Hamiltonian H(u, k, >.) above can be separated for each agent
h, into two parts
Hh(uh, kh, >.h) = H hO + Hh1
where Hho is the "unperturbed" Hamiltonian of household hand Hh1 _
H(u\ kh, >.\ ii, k, X) is the "perturbed" Hamiltonian reflecting the influence of other
sectors, as shown in (11.62). (Note that "perturbed" here does not refer to the per-
turbation caused by introducing the discount parameter 8 as before, but to the per-
turbation caused by the action of other agents). Assuming that the "unperturbed"
HDS experiences a Hopf bifurcation at 8 = 8* causing a periodic orbit, Lorenz shows
that, under the action of other agents causing the perturbed H h1 , application of the
Newhouse, Ruelle and Takens (1978) theorem points to the emergence of chaotic
motion in the HDS.
Although the investigation of chaos in OEC models is still at an exploratory
stage and has an ad hoc character, it leads to the important conclusion that chaos
in OEC models is a distinct possibility, in which case, it is impossible for agents to
calculate the results of their optimal programmes except in a very short run: strange
attractors cause optimal paths starting close to one another, to diverge widely from
one another after a few periods.

11.7. Conclusion

In this chapter, we have discussed ODS, optimal in that they are optimally con-
trolled in order to achieve some specific objectives given in the objective functionals.
We have shown how Pontryagin's Maximum Principle is derived from the Variational
Calculus and how solving an optimal Control problem amounts to solving the asso-
ciated HDS, referred to as ODS. The necessary and sufficient conditions have been
discussed as well as the stability of ODS, both the asymptotic and structural stabil-
ity. The concept of optimal economic fluctuations caused by Hopf bifurcation has
been analyzed as well as the emergence of chaotic motions which make any longrun
predictions and planning unreliable.
No doubt Optimal Control theory cannot be presented in one chapter: a book
would be required (see, for example Tu 1984, 1991). Omissions are inevitable. For
example, discrete ODS and their stability have not been discussed, although they
could be derived very simply (see Tu, 1984, 1991), and their stability could be shown
with reference to the "unit circle" , instead of the "open left half complex plane".
 269

Nevertheless it can be seen that considerable grounds have been covered in one
chapter.
Chapter 12
Some Applications in Economics and Biology

12.1. Introduction

Dynamical Systems (DS) have been applied in almost every field. In this chapter,
we shall present some applications in Economics and Biology.
The selection is difficult: as a tool, DS has been widely used in so many areas,
and besides, the various applications have been presented in the various chapters
throughout the book, as illustrations of the various dynamical tools of analysis. In
Economics, we shall limit our presentation to some major areas such as Business
Cycles, General Equilibrium and Economic Growth and in Biology, to ecology since
population dynamics, arguably, is a field in which DS find a natural application.
To this, will also be added the dynamics of a heartbeat since this provides a good
example of modelling a complicated biological phenomenon, and also as an applica-
tion of Folds and Cusps, analyzed in Chapter 10, it is a respectable example which
stands up to the severest critics of Catastrophe Theory applications.
Clearly, in view of the space constraint, and a selective presentation, this chapter
does justice neither to the work reviewed, because of the various oversimplifications
required, nor to the work omitted which is even more numerous. The choice is made
on the basis of applicability of the various dynamical tools treated in this book,
rather than an extensive review of economic or biological theory in any area.

12.2. Economic Applications of Dynamical Systems

12.2.1. Business Cycles Theories

Economic fluctuations are natural candidates for D.S. applications, as can be seen
from the reviews undertaken by Zarnowitz (1985), Gabish & Lorenz (1987), Lorenz
(1993) among others. Although earlier economists have advanced various theories,
from money and banking (Hawtrey), innovation (Schumpeter), expectations (Pigou,
Bagehot) underconsumption (Hobson, Foster), overinvestment (Hayek, Mises), to
sunspot (Jevons, More) theories (for a detailed survey, see Haberler (1958)), it was
not until the late 1930's that Business Cycle Theories were rigorously formulated,
using difference and differential equations. The main ones are the linear multiplier-
accelerator models (Samuelson, Hicks), nonlinear models (Goodwin, Kaldor) optimal
fluctuations model (Medio) and Chaotic model (Grandmont). We shall briefly review
these, concentrating on the dynamic tools applied.
272

1. Linear Multiplier-Accelerator Models.

The first rigorous mathematical formulation of the theory of Business Cycles is

perhaps Samuelson (1939) and Hicks' (1950) linear multiplier-accelerator models in
which consumption (Ct ) is a linear increasing function of previous period's income
(Yi-1) and investment (It) is a linear function of changes in consumption (Ct - Ct- 1)
in Samuelson and in income changes (Yt-1 - Yt-2) in Hicks. More precisely

Samuelson's Model Hick's Model

Ct =CYt-1 (O<c<l) Ct = (1 - 8)Yt-1 (0 < 8 < 1)

It = v(Ct - Ct- 1 ) (v> 0) It = V(Yi-1 - Yt-2) + A
Yi = C t + I + t + G Yt = Ct + It

Yt - c(l + V)Yt-1 + CVYt-2 = G Yt = (1 - 8 + V)Yt-1 + VYt-2 = A

(12.1) (12.2)

where c = MPC, 8 = MPS, c + 8 = 1, 1/8 = 1/(1 - c) is the multiplier and

v (> 0) is the accelerator. As can be seen, both are reduced to a second order
difference equation whose solution is obtained by using equations (3.27) through
(3.30) and with Government expenditure G = Go, autonomous investment A = Ao,
kept constant, both give the same results (see Ch. 3, fig. 3.7, 3.8 and 3.9)
In the same vein, Metzler (1941) studied the inventory cycle. He assumed that
producers desire to maintain inventory at a level proportional to sale (kCt - 1 =
kCYt-1). The actual stock (5t ) differs from its planned level by the amount sales
(Ct ) differs from expected sales based on previous periods (Ct-t), i.e.
(12.3)
Output (or income) Yt is produced to meet sales C t - 1, to maintain the inventory
level kCt - 1 - 5 t - 1 (which is the difference between desired stock kCt - 1 and actual
stock 5 t- 1 ) and also to satisfy some autonomous investment level At. From the
accounting identity
Yt = C t- 1 + (kC t- 1 - 5t- 1) + At (12.4)
we obtain, on substitution and rearrangement,
Yt - c(k + 2)Yi-1 + c(k + 1)Yt-2 = At (12.5)
which, again, is a second order linear difference equation whose solution is given by
equation (3.27) in Ch. 3. Stability is determined by the characteristic (or auxiliary)
equation ,\2 - c(k + 2)'\ + c(k + 1) = 0 i.e.
1
,\ = 2" [c(k + 2) ± ~l
 273

where ~ == Cl(k + 2)2 - 4c(k + 1). The results depend on sgn ~ i.e. ~ ~ 0 if
b ~ 4(1 + v)j(2 + v)2 : if 0 < c < l~v , the solution path is periodic convergent if
c = l~v the solution is a constant cycle if l~V < c < tJ~~)J , it is periodic divergent
and if tJ~~)l ~ c, it is monotonic divergent.

2. Nonlinear Models.

Under this heading, we shall examine Goodwin (1951) and Kaldor's (1940) model
as reformulated by Chang & Smyth (1971) and also Goodwin's (1967) class struggle
model.

2.1. Flexible Multiplier-Accelerator Models.

Samuelson's model was highly successful at first but its limitations have been
quickly recognized: the economy cannot blindly follow the dictates of a mechanistic
multiplier accelerator: there is an upper limit imposed by full employment and a
lower limit set by the depreciation rate. Thus Hicks (1950) and Goodwin (1951)
quickly imposed a ceiling and a floor to investment k as follows

. {b0 > 0
K=
if K < K*
if K = K* (12.6)
-d if K > K*

where K = actual capital stock, and K* = vY = desired or required or warranted

capital stock required to produce output Y, v being a constant capital output ratio,
the usual accelerator. The economy is a closed Keynesian type, with the Consump-
tion function C and investment k

C = a + cY (a> 0,0 < c < 1)

Y = C + k national income identity. (12.7)

Substitution gives the Keynesian equilibrium income

1 . 1 .
Y = -(a+K) == -(a+K). (12.8)
1-c s

The desired capital stock K* is thus K* = vY = ;(a + k). Substituting k by

b, 0, -d in each case gives

Ki = v(a + b)js if K < K*

K'= { Ko = vajs if K = K* (12.9)
Ki = v(a-d)js if K > K*.
274

At the start of the cycle, let J{ < J{~, i.e. there is a shortage of capital. Investment
then proceeds at the maximum rate J{ = b while Y remains unchanged until J{ = 1<;
when J{ = J{* and hence J{* = J{o. Now J{ = J{i > J{* = J{o so J{* switches to
J{;. Thus J{* changes from 1<; to 1q

i{

B C
K

Iq K·0 K·2
K
o~~-----+--~~-------
0
A D
(a) (b)

Figure 12.1. Goodwin's nonlinear multiplier accelerator model

and k from b to -d (see fig. 12.1a). Y falls discontinuously by (12.8) as a result of

a discontinuous change in i<.. Now I< decreases to J{ = I<;. Similarly J{* switches
to I<i so that I< < I<* and k = b again, and the cycle repeats itself. The phase
diagram in the I<k plane (see fig. 12.1b) where jumps from A to Band C to D
correspond to the discontinuities of fig. 12.1a. Thus Goodwin obtained a constrained
business cycle with both income and capital stock fluctuating within the upper and
lower bound. However, this sawthooth model, with its abrupt responses of output to
investment, is rather unrealistic. By introducing the investment lag IJ and multiplier
lag IJ, Goodwin obtained a second order differential equation

€IJfj + (€ + sIJ)y + 4?(y) + sy = A(t)

where 4?(Y) is investment induced by changing income (Y). It A(t) = A = constant
autonomous investment, the above could be rearranged as

y+A(y)y+B(y)=O (12.10)

where B(y) is an odd function with B(O) = 0, A(y) an even function with A'(O) <
o < A(O). This gives a unique limit cycle (see Ch. 7). If the autonomous investment
function is periodic, of period T, i.e. A(t + T) = A(t), instead of being a constant
A, the above becomes a forced oscillator of a Van der Pol type and can be shown
to possess two stable limit cycles containing an infinity of unstable limit cycles.
Lorenz (1987) has shown that this gives rise to a period-three cycle which, by Li
& Yorke's Theorem (see Ch. 10) implies chaos. As Lorenz pointed out, actually
by introducing lags, Goodwin (1947) has shown the emergence of chaos in Business
Cycles long before the name "chaos" was invented.
 275

2.2. Kaldor's Type of Flexible Accelerator Models.

Other efforts at nonlinearity have been made by Kaldor (1940) who introduced
nonlinear investment (/) and Saving (S) functions: Whereas both are increasing
functions of income (Y), I is flatter than S at very low Y because of excess capacity
and at very high Y level because of saturation of investment opportunities, and
steeper than S at "normal" or medium income range where investors are more
sensitive to rising Y than savers are. Assuming these intersect at 3 points (see
fig. 7.17 in Ch. 7), business cycles are generated by an upward shift of I, causing a
stable and unstable equilibrium point to coalesce and end at the high stable point.
Kaldor left his insightful model thus loosely formulated at that. It was Chang
and Smyth (1971) who applied the rigorous dynamic tools to bring out the right
properties therein. Kaldor's model can thus be formulated more explicitly as a
planar D.S.

Y= v[I(K, Y) - S(Y, K)]

k = I(Y,K). (12.11 )

Chang & Smyth have detected that with these sigmoid I and S functions, all
Poincare-Bendixson's conditions are satisfied and hence a limit cycle emerges (see
Ch. 7). Furthermore, it could be shown, on time differentiation and grouping terms,
that
(12.12)
which is a typical Lienard function provided I and S behave as assumed (/y == aI laY
etc ... ), and hence this limit cycle is unique. Furthermore, it could also be modelled
as a Cusp Catastrophe, as has been shown by Varian (1979) and Tu (1982) (see
Ch. 10).

2.3. Goodwin's Class Struggle Model.

Another nonlinear model, away from the Keynesian stream of the previous mod-
els, is formulated by Goodwin (1967). Inspired by Lotka-Volterra model, Goodwin
visualized economic fluctuations as an outcome of the struggle between capitalists
and workers in order to secure a larger share of income. This is a system of two
nonlinear differential equation in x (employment rate) and y (worker's income share)
with 0 < x, y < 1, as follows

i; = x f(y)
iJ = y g(x) (12.13)

where f(y) = a - by and g(x) = ex - d (see Ch. 7 for more details). The result is a
harmonic motion causing x and y to fluctuate perpetually between a maximum and
minimum, averaging at the "coexistence" equilibrium which is never reached. This
276

model has been extensively studied and enriched by Vilupillai (1979), Wolfstetters
(1982), van der Ploeg (1983) and Flaschel (1984) among others (see Ch. 7).

3. Optimal Economic Fluctuations and Chaos.

Economic fluctuations, causing inflation during booms and unemployment during

depressions, are generally considered to be economically undesirable. However, it
has been shown, recently, for example by Medio (1987) that these fluctuations can
be optimal.
Consider an n-sector optimal economic growth model whose first order condi-
tions, obtained by use of Pontryagin's Maximum Principle (see Ch. 11), are reduced
to the following perturbed Hamiltonian Dynamic System (PHDS)

k = Hq
q=-Hk+O(t) (12.14)

where H = u(c) + q(J(k) - Ak(t) - c(t)] is the current valued Hamiltonian function
(see Ch. 8 and 10) where f(k) = output, k(t) = capital, c(t) = consumption all per
capita and q(t) = costate of k(t) and 0 is the constant discount rate, considered as
a parameter whose variations cause a Hopf bifurcation. Medio (1987) has noticed
that such periodic motions generated by the stable limit cycle to which the Hopf
bifurcation gives rise, satisfy all Pontryagin's optimality conditions, including the
transversality requirements and hence are optimal.
Finally, business cycles could be chaotic: they can exhibit very complex dynam-
ics. Contrary to the claim (by Lucas, Prescott, Sargent and others. See Zarnowitz
1985 for details) that for economic fluctuations to emerge, stochastic shocks must
be present, Grandmont (1985) and others have shown that a totally deterministic
economy can give rise to fluctuations and chaos, and the complex DS thus obtained
exhibits all the properties of a stochastic model although there are no stochastic
elements in it. For a recent comprehensive review of complexities in deterministic
nonlinear Business Cycle models, see Lorenz (1993).

12.2.2. General Equilibrium Dynamics

Another major area of application of D.S. is General Equilibrium (G.E.). In a de-

centralized economy where consumers maximize their utility subject to their budget
constraints and producers maximize profit within technical conditions, G.E. consists
in finding a price vector p such that all markets are cleared, i.e. supply (5) is equal
to demand (D), or excess demand [D(p) - 5(p)] is zero in every market. More
precisely, in an exchange economy of m goods x E Rm, commanding price pERm,
excess demand is
(12.15)
 277

In view of Walras law that L:i" pjEj == 0, only m - 1 equations are independent,
hence putting Pi = 1 as a numeraire, we have

(12.16)

This is arrived at as a result of the competitive behaviour of the individual consumers

maximizing their utility

subject to
(12.17)
j j

where Xij (p) and Yij (p) are respectively, agent if s demand and supply of good j,
i.e. E j == L:i (Xij - Yij) total excess demand for good j in the market by all agents.
The main areas of investigation in G.E. are the existence, uniqueness and stabil-
ity of the equilibrium price vector. The existence theorem has been proved by use
of Brouwer and Kakutani's Fixed point Theorems, the uniqueness has been estab-
lished for some cases such as Gross substitutes, weak axiom of Revealed Preference.
We shall briefly examine the stability problem, both local and global, mainly in
the context of the Tatonnement model, and briefly mention the non-tatonnement
dynamics.

Tiitonnement Adjustment Process

Consider Walras's tatonnement process where prices (p) change instantaneously

in response to excess demand E(p), i.e ..

p = kE(p) (12.18)

where p E Rm-l, k == diag (k 2 , .. . ,km) = speed of adjustment, E(p) =

[E2 (p), ... , Em(p)J. At the price p cried out by the auctioneer, adjustment is made
in each market until demand is brought into equality with supply. Then trading
takes place.
Linearization of (12.18) about equilibrium price p* at which E(p*) = 0, assuming
(12.18) is hyperbolic and putting k = I for simplicity, gives

p = kE(p*) + kA(p - ji) + H.O.T. (12.19)

where A == DE(p*) = Jacobian of the linearization about p*. Since E(p*) = 0 by

definition, stability conditions are reduced to Re (.Ai) < 0 where .Ai (2 ::; i ::; m)
is an eigenvalue of A. Efforts are then concentrated on identifying the economic
conditions which brings this about. Some main findings are summarized in the
following theorems:

Theorem 12.1. (Local Stability). G.E. is locally stable under any speed of ad-
justment if anyone of the following conditions holds
278

(i) There is no trade at equilibrium

(ii) All goods are gross substitutes i. e. aij > 0 Vi =I- j and aij < 0 Vi = j
(iii) A is quasi-negative definite
(iv) A is quasi dominant diagonal
(v) A is Hicksian i.e. aii < 0 Vi and sgn aij = sgn aji and sgn aijajk = sgn aik.
Proof. Arrow & Hurwicz (1958), Arrow, Block & Hurwicz (1959), Metzler (1945),
Newman (1959), McKenzie (1960), Quirk & Ruppert (1965), Hahn (1958), Arrow &
McManus (1958), Negishi (1962), Samuelson (1941). Note that the same references
were given in Ch. 5 when linear G.E. was used to illustrate the stability in linear
D.S.

Theorem 12.2. (Global stability). G.E. is globally stable if anyone of the fol-
lowing conditions holds:
(i) there is no trade at equilibrium, in the pure exchange economy;
(ii) the Weak axiom of Revealed Preference hold (i.e. pOx l ::; pOxo implies pI xO >
pI Xl where xO, Xl are two distinct baskets and pO, pI their respective price vectors)
and Walras law (Lj pjEj = 0) holds;
(iii) A is quasi-negative definite everywhere;
(iv) A is quasi-dominant diagonal, with aii < 0 for all ij
(v) all goods are gross substitutes.

Proof. Most proof make use of the Liapunov function 2V(p) == (p - p*), I(p - p*)
(i.e. B = I : all weights are equal. See Theorem 5.5 above), which is the (equal)
distance function of p from its equilibrium level p*, and show that, under the above
cases, V < 0 i.e. W == A'B + BA = (A' + A) is negative definite (see eq. 5.27).
For details, see Hahn (1982), Negishi (1989) and also the references listed in section
5.8.3 in Ch. 5.

Non-Tatonnement Models

Walras' Tatonnement process above assumes an economy with a fixed stock

given by initial endowment, where, given the "auctioneer's rule p = kEep), trade
takes place only when equilibrium is reached. This works very well in a stock
exchange room, but less well when there is no auctioneer and exchange takes place
out of equilibrium, and also when goods are storable: unsold stocks accumulate and
"initial" endowments vary each day, which will affect total Supply and Demand.
This consideration leads to the formulation of non- tatonnement models

p = kEep, y), or in full pj = E j (P2, ... ,Pm, Yll,· .. , Yhm) (12.20)

Y = F(p,y) or in full Yj = Fij (P2, ... ,Pm,Yll,.··, hhm) (12.21 )
 279

where (12.20) is (12.18) except that E j is explicitly function of p and Y where

Y == (Yn,.·., Yhm) and Yij = agent i's stock of the j good (i = 1,2, ... , h). This is
included since the Yij are no longer constant "initial endowments" but are changed
by disequilibrium transactions among the h households. Furthermore, Yij are not
autonomously given but are functions of p and Y, i.e. the changes in stock holdings
depend on the prices offered and on the level of existing stock. Thus tiitonnement
models must satisfy initial endowment whereas non-tiitonnement models must also
satisfy "current endowments". Mathematically, (12.18) is enlarged by the second
group of equations iJ = F(p, y), but the technical stability analysis remains un-
changed.

12.2.3. Economic Growth Theories

Naturally D.S. has been widely used in economic growth theories. We shall briefly
present their development and their use of more and more sophisticated dynamic
tools.

1. Harrod-Domar's Models.

The earliest mathematical formulation of economic growth theory was made by

Harrod (1948) and Domar (1957) who conceived of a moving equilibrium growth
where the Saving-Investment equality is maintained. As has been seen in Ch. 2,
investment (1) is induced by income changes (Y) i.e. I = vY and Saving (3) is a
linear increasing function of income i.e. 3 = sY(O < s < 1). Moving equilibrium
implies 1= 3 i.e. vY = sY. This is a first order differential equation whose solution
is Y(t) = Yoe(s/v)t. But Y(t) = min[K(t)/v, L(t)/u], with rigid technology, where
(K, L) = (capital, labour). With labour growing exogenously at a constant rate n,
a full employment (of both capital and labour) requires Y, K to grow at rate 9 = n
i.e. 9 = s/v = n. Any 9 > n could not be sustained and any 9 < n would have
unemployment. Since saving propensity sand n are independently determined, full
employment growth s/v = n is a fluke. This knife-edge instability has been pointed
out by Jorgensen (1960) who showed for the Lyapunov function V = (9t - 9w)2
(where 9t = actual growth rate and 9w = s/v = warranted rate) V > 0 in every
case. Thus instability is inherent and self aggravating.

2. Neo-Classical Models.

The Neo-Classical model was formulated by Solow (1956) and Swan (1956) who
recognized that it is the rigidity of technology which condemns the Harrod-Domar
280

economy to eternal instability: if capital and labour are substitutable to each other,
i.e. K / L == k is a variable, then a capital surplus would lead to capital deepening
and maintain full employment growth. Thus, K and L no longer have to grow at
the same rate. With labour growing at a constant rate n, production taking place
at constant returns to scale i.e. Y = F(K, L) = LF(K/ L, 1) == Lf(k), the Saving
(S)-investment (1) equality gives the fundamental neo-classical growth law

k= sf(k) - (8 + n)k (12.22)

where f" < 0 < f' and 1'(00) = 0, 1'(0) = 00 (Inada's conditions) guarantee the
existence and uniqueness of equilibrium growth sf = (8 + n)k, as has been seen in
Ch.2.
The neo-classical growth model has been extended to two sectors, multisectors,
with and without money, as well as optimal growth.

2.1. Two-Sector Models.

The aggregate model above has been extended to two sectors, producing capital
goods Yl = it(kd and consumption goods Y2 = h(k2) by Uzawa (1961) who con-
cluded that, with the usual concavity assumption fI' < 0 < ff (i = 1,2), stability
requires the capital goods producing sector it (kl) to be less capital intensive than
the consumption goods sector h(k2), i.e. kl < k 2. Solow (1961) finds it paradoxical
that "such an important characteristic of the equilibrium paths should depend on
such a casual property of the technology" (Solow 1961 p. 48). Solow's remark has
led to further research work which introduced the elasticity of factor substitution
a == (dk/dw)w/k where w == w/r = wage/rental ratio, the separate saving rate of
capitalists Sr and workers sw. The model has six variables x == (Yl, Y2, k 1 ,k2,w,p)
where p == L1/ L = ratio of labour employed in the capital goods sector to total
labour force L. This leads to the fundamental growth equation

(12.23)

The main stability results obtained are

Theorem 12.3. Letk*beanyrootofh(k)=Oin(12.23}andletx*=1J(k*). Then

the model is locally stable, i. e. h' (k*) < 0 if either swit (ki) ~ nk* or Sr it (ki) ~ nki.

Proof. Burmeister & Dobell (1970) Ch. 4.

Theorem 12.4. Local stability and uniqueness obtain i.e. h'(k) < 0 Vk E (a, b) and
k* such that h(k*) = 0 is unique, under regular (non vanishing Jacobian) conditions
if anyone of the following conditions is satisfied
(i) Sr ~ Sw and kl ::; k2

(ii) a ~ 1
 281

(iii) rT2 ~ 1

(iv) Sr = 1
(v) Sw = o.
Proof. Burmeister & Dobell (1970) and references given therein.

2.2. Economic Growth with Money.

Money has been incorporated into Swan-Solow's model by Tobin (1965). Money
matters: equilibrium k* is influenced by the rate () == if 1M of increase in nominal
money supply (M).
Let x == mlp == (MIL)lp = per capita real money balances; p = output price
in terms of money as a numeraire; r(k,x) = f'(k) - 8 + pip where PiP = E(plp)
i.e. the expected rate of inflation is assumed equal to the actual rate, i.e. with the
constant depreciation rate 8,

pip = r(k,x) - f'(k) + 8 (12.24)

x
:; =
(mm - p) =
p
if
M -
t p
L - p.
Substituting, and putting .x == () - 8 - n, gives

x= [J' (k) + .x - r(k, x)]x == 1lI(k, x). (12.25)

The fundamental neo-classical growth function becomes, after much substitution

and simplification (see Burmeister & Dobell 1970 Ch. 6)

k= sf - (n + s8)k - (1 - s)[f' - 8 + () - r(k,x)]x == if(k,x). (12.26)

These two equations (12.25) and (12.26) form a planar DS whose linearization about
equilibrium point (k*, x*) gives

i = Ax + H.O.T. (12.27)

where z == (k - k*, x - x*) and

A -= [ifk if"'] .
1/;k 1/;",

Under the economic assumptions of the model, ifk < 0 < 1/;." if",,1/;k < 0, det A < 0
which gives a SP equilibrium (see fig. 12.2) with positive (x*, k*) In the absence of
money (12.26) becomes

k= sf(k) - (n + s8)k == if(k, 0). (12.28)

282

This, together with (12.25) gives it = Az where

A = [:: ~x]

x x=o

k=o
k
0

Figure 12.2. Growth with money

It is easy to see that 'ljJ(k,O) being independent of x, tr A = 'Pk + 'ljJx < 0 and
det A = 'ljJx'Pk > 0 and hence the model is stable.
This model has also been extended to incorporate inflation p/ p as a third equa-
tion by Benhabib and Miyao (1981) who have shown the emergence of Hopf bifur-
cation, as has been seen in Ch. 10.

2.3. Optimal Economic Growth Models.

The neo-classical growth model has also been optimized as one-sector, two-sector
and multisector models where Pontryagin's Maximum Principle is used to obtain
optimality. These have been discussed in detail in Chs. 8 and 11 where the emergence
of Hopf Bifurcation, limit Cycles and Chaos has been shown, and also above under
Optimal Business Cycles.

2.4. Endogenous Economic Growth Models.

Finally, before concluding this section, a few words should be said about the
latest development: endogenous growth with increasing returns by Romer (1986,
1990) Rebelo (1988), Lucas (1988) among others.
With a few exceptions such as Ben Porath (1967) Shell (1966), Uzawa (1965),
Tu (1966, 1969, 1970) and Denison (1962) under Schultz's (1961) inspiration, tradi-
tional growth models overemphasized the role of physical capital (K) to the point
 283

of neglecting human capital (He). This sin of omission is responsible for the failure
of Growth theory to account for many phenomena such as the high rate of returns
on capital in capital rich countries, which goes against the law of diminishing re-
turns. Human capital in the form of educational training and research, apart from
its cultural value, is a crucial factor of production and an engine of growth. The
"german economic miracle" in the postwar period, under the Marshall Plan, would
not have occurred without the HC stock there: the same foreign aid spent on Cam-
puchia would not produce any noticeable economic results because the modicum
of HC stock was virtually wiped out in the Killing field. Physical capital without
HC would never produce economic growth. But technical progress (A), the fruit of
education and research, is financed from resources within the economy: it does not
come free like manna from heaven. Thus, production exhibits increasing returns:
F()"K, )"L, )"A) > F()"K, )"L, A) = )"F(K, L, A) i.e. F is linearly homogeneous in K
and L. But under increasing returns, factors payment according to their marginal
product would bankrupt the economy. To rescue equilibrium, external economies
are brought in: technical progress is a form of external economies firms do not take
into account in their maximization decision although it benefits society as a whole.
Thus, there are constant returns at firms' level but increasing returns at industry and
society level, as has been taught by Marshall (1890) and Meade (1952) among oth-
ers. With this increasing returns feature, endogenous growth models are formulated
like others, and the usual dynamic tools are applied. For example, with an increas-
ing returns production function F(K, L, H, A) described above, a usual increasing
concave utility function U(C), Romer (1990) casts his model in the framework of
an Optimal Control model of

subject to
[(=y-C
A= aHaA
Ha+Hy = H
where Y = F(A, H, K, L) as above, a is average product H, Ha, Hy are respectively
the total HC stock H, allocated to R&D and production. The current valued
Hamiltonian is
H = U(C) + )"(Y - C) + JlaHaA
where the necessary conditions of Pontryagin's Maximum Principle give, for interior
maximization,
He = 0; .x = p).. - H k ; it = PJl- Ha.
This is a typical PHDS with two degrees of freedom, discussed in detail in Chs. 8
and 11.
284

12.3. Dynamical Systems in Biology

Another area of extensive application of D.S. is Biology, especially Ecology. This

section is by no means a review of Mathematical Biology or Biomathematics: excel-
lent such books exist, for example May (1973) Smith (1974), Halfon (1979), Goel,
Maitra & Montroll (1971), Rescigno & Richardson (1967), Rosen (1973), Freedman
(1980), Goh (1970, 1980), to name only a few. Rather it presents some biological
applications of D .S., to illustrate the importance of these dynamic tools in biological
research.
We shall briefly discuss some major population dynamic models, showing the
process of gradual evolution of biological thought and with it a gradual application
of more and more sophisticated dynamical techniques, such as the modelling of a
heartbeat with Catastrophe theory. Finally, Economics and Biology will be brought
together by the thread of D.S. under the heading of Bioeconomics and optimal
management of natural resources.

12.3.1. One-Species Growth Model

The simplest one-species model is Malthus' theory of population (x) growing at

some geometric rate (a)

x = ax (a> 0), x(O) = Xo (12.29)

whose solution is x(t) = xoe at as has been seen in Ch. 2.

Clearly this theory is too crude. Verhulst (1838) has seen the necessity to im-
pose some biological ceiling (K), called carrying capacity. This leads to various
mathematical formulations, the best known of which is the logistic growth law

:i; = rx(l - xl K), x(O) = Xo (12.30)

which means that population grows (r > 0) so long as x < K, until it reaches the
ceiling K when x I K = 1 and :i; = 0 : it stops growing. The solution, by separation
of variables
J(~ + k ~ x) dx = Jrdt
IS
k
x(t) = -l-+-c-e---
rt (12.31 )

where c == (K - xo)lxo. Population is globally stable: it grows if Xo < K, decreases

if Xo > K, in either case it approaches K in the limit.
The discrete counterpart of this logistic curve, setting K = 1 for convenience, is

(12.32)
 285

This seemingly innocuous nonlinear first order difference equation, depending on a

single parameter r, could give rise to a very complex D.S., for some values of r, as
has been shown in detail in Ch. 10. May (1974) was perhaps the first one to notice
the presence of period doubling and chaos in this model.

12.3.2. Two Species Models

When one species encounters another, some outcomes are possible among which
two best known ones are: prey-predator and competition for the same food supply.

1. Predation Models.

The prey (x)-predator (y) model was originally developed by Lotka (1925) and
Volterra (1931) from observations of the various fish populations in the upper Adri-
atic in the 1920's. It describes the nature of population fluctuations. The model
IS

x = xf(y) = x(a - cy)

iJ = y g(x) = y(dx - b) (12.33)

where a, b, c, d are positive constants. Without predators, the prey population (x)
grows at the Malthusian rate ax which is decreased by cxy as a result of encoun-
ters with predators. Similarly, without preys as food, predators decrease at rate
- by, but the appearance of preys helps slow down this decrease by dxy. This
model has been analyzed in some detail in Ch. 7 where it was shown that the co-
existence (x', y' > 0) equilibrium is a centre, which shows perpetual fluctuations of
the harmonic motion type.
This model is unsatisfactory as it stands because of unending fluctuations and
also because it is structurally unstable: a slightest perturbation would turn it into
a stable or unstable focus.
Samuelson (1967) noticed that and introduced decreasing returns caused byover-
crowding and increasing returns brought about by increased density. The Lotka-
Volterra model is thus modified to

x=x(a-cy+ax)
iJ = y(-b+dx+f3y) (12.34)

where a, b, c, d are positive as before and a, f3 > 0 for the case of increasing returns
and a, f3 < 0 for decreasing returns. The results are that the neutrally stable
equilibrium now becomes a stable focus for decreasing returns and unstable focus for
increasing returns (see fig. 12.3) A generalized Lotka-Volterra model was formulated
286

very early, by Gause (1934), as follows

± = xr(x) - yp(x)
iJ = y[-b + q(x)] (12.35)

0'-------- Z o

(a) Increasing returns (b) Decreasing returns

Figure 12.3. Samuelson's Increasing (a) and Decreasing (b) Returns

where r(x) is the rate of growth of x and p(x) is the predator's influence function
unfavourably affecting the prey population and q(x) is the prey's influence function
favourably affecting the predator population. Thus, even in the absence of predators,
the prey population does not grow at a constant rate a as in Lotka-Volterra model,
but by r(x) which is much more general. Similarly the effect on preys of encounters
with predators is not cxy but yp(x). With the assumptions that (i) r'(O) < 0 < r(O),
(ii) p(O) = 0 < p'(x), p'(O) > 0, p(oo) = p; (iii) q(O) = 0 < q'(0), q'(x) > 0,
q(oo) = ij it has been shown that the model has 3 equilibrium points (0,0), (K,O)
and (x*, y* > 0) where K is the carrying capacity and (x*, y*) is the coexistence
equilibrium which is a w-limit set which is either an equilibrium or a limit cycle.
(see fig. 12.4)

II

oL--~---L--Z

Figure 12.4. Gause's Model

Another important generalization of Lotka-Volterra model, perhaps the most

general one, was formulated by Kolmogorov (1936) and expounded by many others
 287

such as Rescigno & Richardson {1965}, May {1972}. It is

x = x/{x,y}
if = yg{x,y} {12.36}

with the following properties assumed by Kolmogorov:

{i} For a fixed x, predators cause the growth rate of preys to decline, i.e. I" < OU" =
81/8yetc . ... }
{ii} For a fixed x/V ratio, i.e. along a vector from the origin, the change in I{x,y} is
negative: increasing predators cause decreasing prey population, i.e.

{iii} Similarly, gIl < 0

{iv} I{O,O} >°

{v} There exist points A, B < C, all positive, such that I{O,A} = 0, I{B,O} =
°g{C,O} °{see fig. 12.5}.
=

o,L..---"""'"=:------..l----z (prey)

Figure 12.5. Kolmogorov's model

Under these conditions, Kolmogorov {1936} and also Rescigno & Richardson
{1965} conclude that there exists either an interior {coexistence} equilibrium point
E, or a stable limit cycle or both. For a proof, see Kolmogorov {1936} Rescigno
& Richardson {1965}, also May {1972} who noticed some inconsistencies which he
corrected.
Waltman {1964} introduced a parameter J.L to Kolmogorov's model

x = J.L x/{x,y}
if = yg{x, y} {12.37}
288

and showed that there exists some critical value J.lo of J.l such that r(J.lo) = 0 < r(J.lo)
and <5(J.lo) > 0 where r(J.lo) = trace A, <5(J.lo) = detA, and A is the Jacobian of the
linearization of (12.37) i.e. J.lo gives rise to a Hopf bifurcation (see Ch. 10).
Finally, note that the Lotka-Volterra type model has been extended in many
directions. For example Takeuchi & Adachi (1983) have extended it to 2 tropic
levels with two-prey one-predator, two-prey two-predator systems and by the use of
perturbation methods and Hopf bifurcation, have shown that adding more species
increases diversity. They have also shown that (i) the coexistence equilibrium is
globally stable; (ii) the existenced of Hopf bifurcation into stable limit cycle, and
(iii) the emergence of chaotic motions. Gardini, Lupini, Mammana & Messia (1987)
have generalized the model to n species and found Hopf bifurcation of the three-
population equilibrium point, stable periodic orbits and the transitions to chaotic
attractors via sequences of Hopf bifurcations and period-doublings. Moreira (1990)
has also shown the uniqueness of limit cycles in predation models.

2. Competition Models.

Consider two populations, for example two species of fish, which do not prey on
each other but compete with each other for a common food supply. Each species
in isolation, grows according to the logistic law :i; = x(ao - a1x), iJ = y(bo - b1y).
The presence of another species will reduce the available food supply and hence slow
down the growth rate of the other species, by a2xy and b2xy and respectively, as
follows

:i;= s !(x, y) == x(ao - a1x - a2Y)

iJ = y g(x, y) == y(bo - b1y - b2x) (12.38)

with ai, bi > 0 (i = 0,1,2). It can be shown that this model has 4 critical points:
total extinction E1 (0,0), partial extinction E 2(0, bo/bt} , E3(aO/a1' 0) and coexistence
E4(X*, y*), with x*, y* > 0, determined by the intersection, assumed to exist, of
!(x, y) = 0 and g(x, y) = 0 curves. The nature of these equilibrium points depends
on the eigenvalues of the linearization of (12.38) about these points which in turn
depend on the assumptions made about the relative magnitude of these coefficients.
For example, at (0,0), A(O,O) = diag (ao, bo) with both eigenvalues >'1 = ao, >'2 =
bo positive, the origin is a source. This model has also been extended in several
directions. We cannot go into these here, but will rather report one more application
in another area of Biology: the heartbeat.

12.3.3. The Dynamics of a Heartbeat

The heart is in one of the two states: the relaxed state (diastole) and contracted
state (systole). When it stops beating, it is in the diastole state which is a stable
 289

equilibrium. What makes the heart contract is the electrochemical wave which
reaches each individual fibre and triggers the action. Each fibre remains contracted
then rapidly relaxes, causing a jump return to equilibrium. Zeeman (1972, 1973)
models these phenomena with a Van der Pol and Lienard equations (see Ch. 7). The
simplest D.S. having these properties is
EX = (x 3 - X + b)
b= x - Xo (12.39)
where x is the length of muscle fibre, (with Xo > 1/../3), E > 0 and b is some
electrochemical control. The equilibrium manifold M : x 3 - x + b = 0 is a double
fold curve, consisting of two stable equilibrium portions, separated by an unstable
one in between (see fig. 12.6)
The equilibrium is stable at E(xo, bo) on the upper fold of M where the lineariza-
tion is
(12.40)

/' b

\~ ......-""=1---.-....1:--
..... _
•••
Figure 12.6. Zeeman's heartbeat: Fast Returns

An increase of b moves the heart from E to T (see fig. 12.6), a threshold which
causes x to jump down to A from T. The muscle then contracts rapidly, sending the
heart from A to T ' , another threshold at which the heart rapidly relaxes along TA'
and slowly returns to the original relaxed state E, where the cycle TAT A' repeats
itself. This models the fast return to E along the x-direction.
To model a slow return, a third dimension is needed: a parameter representing
the tension in the fibre, caused by blood pressure, must be added. The simplest
model is
EX = -(x3 +ax+b)
a = -2x - 2a (12.41)
b= -a-l.
The fixed point (x*, a* ,b*) = (1, -1, 0) at E on M where the linearization is
[t] ~ [-~{E -~f -t] [:] (12.42)
290

with eigenvalues ,\ = [~(-1 ± iV3), -2/f] i.e. E is a stable equilibrium. The

fast eigenvalue is -2/f which indicates the direction parallel to the x-axis and the
complex pair indicates a steady slow return to E along M. Thus, as x jumps from
T to A, a increases (i.e. tension -a decreases) and x slowly returns to E along
the one sheeted portion of the manifold M (see fig. 12.7), in spiral, as dictated by
,\ = ~(-1 ± iV3). But this is exactly the Cusp Catastrophe discussed in Ch. 10.
Note that with tension -a, the above gives for a4 < a3 < a2 < aI, the four situations
al : no tension, the heart is the one sheeted zone, a2 : low tension, a3 : high tension
and a4 : hypertension indicating a heart attack when x enters deeply into the three-
sheeted zone (see fig. 12.7 and also the Cusp Catastrophe in Ch. 9). Thus, Zeeman's
dynamics of a heartbeat provides an illustration of biological application of DS.
Although biologists may disagree with Zeeman that research in Biology should be
conducted in mathematical laboratories, they would appreciate the insight provided
by applications of DS, the Cusp Catastrophe in this case, in biological research.

Figure 12.7. Zeeman's Heartbeat: Slow returns

12.4. Bioeconomics and Natural Resources

12.4.1. Optimal Management of Renewable

and Exhaustible Resources
 291

Given the knowledge of population dynamics reviewed in the last section, a nat-
ural problem arises as how best to control them, to achieve some specific objectives.
This is the field of Management of Natural Resources and Bioeconomics, a meeting
ground of Economics and Biology. The various populations examined in the last
section emerge under the headings of renewable resources, the best known of which
are fisheries and forestry. The economic problem ensure the best numbers and pro-
portions of the various species. But the Economics of Resource management also
deals with non- renewable resources such as mining and optimal extraction, with the
knowledge that more now means less later and unborn future generations must also
be taken into account. In this section, we shall present some application of Optimal
DS (discussed in Ch. 11) in the field of Resource Management.
Thus, given the laws of population dynamics, the problem consists of maximizing
or minimizing some functional, which could be the social utility of having some
species, or the profit or benefit from harvesting renewable resources such as fishing,
forest cutting or from extracting exhaustible mineral resources. In the latter case,
the user costs, reflecting the cost to future generations of depleting non-renewable
resources by the current generation must enter the calculation of intergenerational
equity.
More specifically, the problem is to maximize

l f(x, h)e- ot dt (12.43)

subject to
x= -h(t) + g(x, h) (12.44)
where x(t) is the resource in question, the state variable
h(t) = harvesting rate, the control variable, h E S
g( x, h) = growth rate of x (= 0 in the case of non renewable resources)
f(x, h) : objective function e.g. f = utility function, or profit function or cost
function etc ...
8 = constant discount rate.
This is a standard Optimal Control problem to which application of Pontryagin's
Maximum Principle (see Ch. 11) gives rise to the PHDS

x= Hp
p=-Hx+8p (12.45)

where H = maXhES {J(x, h) + p[g(x, h) - h]}, is the current valued Hamiltonian

function (see Ch. 11) where p is the co-state variable. Note that the above model is
a typical Optimal Control problem formulated in the most general way where f is
a scalar function but g(x, h) could be a scalar or vector function, with X,p, h being
scalars in aggregate models and vectors of suitable dimensions in disaggregated
models. Results depend on specific problems and specific formulations. See, for
example, Clark (1976), Conrad & Clark (1987) among others where problems such
as fisheries, forestry and mining depletion are discussed. Some results are: renewable
resources (where g(x, h) :I 0) would be harvested up to the point at which their
292

marginal net productivity is equal to the social discount rate~. If bang bang control
(see Ch. 11) is used, only h(max) or hemin) = 0 should be used and if initially,
Xo > x*, harvesting should be carried out to the maximum, i.e. h = h(max) and
if Xo < x*, h = O. In the exhaustible resource case, where g(x, h) = 0, we have
a typical isoperimetric problem (see Ch. 11, also Tu 1991 Ch. 7). Results vary
with specific problems. For example, in the problem of extracting non- renewable
resources with the aggregate social utility function u(h) with u" < 0 < u', as the
objective function I(x, h) above, the Maximum Principle gives u'(h) = peot where
p is constant 'Vt E [0, Tj, i.e. optimal harvesting policy is such that marginal utility
u'(h) increases exponentially at the social discount rate ~, which in view of the
concavity of u(h) and constancy of p, implies that later generations consume less
than current generations (see Ch. 11, section 11.4). Using other objective functions
such as profit II(x, h) = ph - c(x, h) = TR - TC variety, Clarke et al (1982),
Wilen & Brown (1986), Clark (1973), Clark, Clarke & Munro (1979) Cropper, Lee
& Pannu (1979) among others, have obtained a variety of results ranging from
selective harvesting to optimal extinction. We cannot go into these here. Rather,
we shall conclude this section with an example of prey-predator control problem by
Goh, Leitmann & Vincent (1974) to illustrate an explicit application of Optimal
Control dynamics.

12.4.2. Optimal Control of Prey-Predator Models

The behaviour of Lotka-Volterra prey (Nd-predators (N2 ) model is well known:

the critical point is a centre and the two species are condemned to a perpetual
harmonic motion around an equilibrium which is never reached. It is structurally
unstable. Goh, Leitmann and Vincent (1974) want to use chemical and biological
control measures to stop these fluctuations and drive these two populations to some
desired target. We shall briefly examine these.

(i) Control by an Ideal Pesticide.

An ideal pesticide is a chemical, applied at rate u(t), that kills pests (preys) (Nd
or predators (N2 ) or both, and leaves no residue. The model is

Nl = (0'1 = f3 1N 2)Nl - bluNl

N2 = (f3Nl - a2)N2 - b2uN2 (12.46)

with Nl (0) = N lO , N 2(0) = N 20 ; Nl (T) = a2/b2, N 2(T) = ad 131 as the terminal

target at an unspecified terminal period T, and 0 :$ u :$ u max • If only pests (preda-
tors) need be controlled, b2 = 0 -:j:. bl (b 1 = 0 -:j:. b2), and if both are to be controlled,
bl -:j:. 0 -:j:. b2 • The objective is to minimize the cost of the total pesticide used and
 293

the total pest damage to crops i.e.

(12.47)

Pontryagin's Maximum Principle (see Ch. 11) gives

~l = -8Hj8NI
~2 = -8Hj8N2 (12.48)

where H == clNI +C2U+AINI +A2N2 with the Transversality conditions H(T}oT = 0

(see Ch. 11)
H[N*, u*, Al = o. (12.49)
This is a Linear Optimal Control (LOC) problem where u*, given by the switching
function (see fig. 10.1) O"(t} == C2 - AlbINI - A2~N2 could only be one of 2 types:
bang bang and singular. The test 0" = 0 = iT = iT shows that for consistency,
singular control must be eliminated, leaving bang bang control u* with the resulting
switching curve (see Ch. 11) as the only possibility. The results (see Goh et al. for
details), to be compared with the uncontrolled model, are presented in fig. 12.8

(a) Uncontrolled (b) Controlled with u·, (v = 0).

Figure 12.8. The Lotka-Votterra Model

(ii) Biological Control.

Chemical control is very effective: it gives speedy results but causes pollution.
An alternative is biological control in the form of release of predators, at rate v, to
control pests (preys), such as the control of cottony-cushion scale by the lady-bird
beetle in California (see DeBach 1964) or release of pests, at rate u, in order to
prevent the extinction of predators. An example of this is the control of red spider
mite (see Hussey & Bravenboer (1971)} or of cabbage worm (see Parker 1971). The
294

Lotka- Volterra model is now

Nl = (al - fJIN2)N1 + U
N2 = (fJ2Nl - (2)N2 + V (12.50)

where Ni (0) = N;o, Nl (T) = ad fJ2; N2 (T) = ad fJl as before T is unspecified and
o ~ U ~ U rnal" 0 ~ V ~ Vrnax •
The objective is cost minimization i.e.

(12.51 )

where Ci ~ 0, (i = 0,1,2,3). The Hamiltonian for the case v = 0 =j: U is

H = CIU + C3Nl + AINI + A2N2 (12.52)

where Nl and N2 are given in (12.50). This is a L.O.C. model and optimal control
u*, given by the switching function cr(t) == Cl + Al (t), as before: cr(t) > 0 =} u* =
o == Urnin, cr(t) < 0 =} u* = U max and cr(t) == 0 =} singular control. Again, the
latter is eliminated by the test cr == 0 = if = if, leaving the bang bang as the only
admissible candidate. Similarly for the case U = 0 =j: v.
Thus, it can be seen that, with a selective application of pesticide and release of
species at appropriate rates, the harmonic motions are brought under control and
the two populations, driven to a desired target. There are many other prey-predator
optimal control models such as Ragozin & Brown (1985), Wilen & Brown (1986),
but we cannot go into them here.

12.5. Conclusion

This chapter provides some applications of D.S. in the various fields of Economics,
Ecology and Bioeconomics. It can be seen, however, even from the small sample of
the work under review, that D.S. is a powerful research tool. No doubt every tool
has its limitations, and nothing can replace the researcher's ingenuity in modelling
Economics and Biology with D.S. It is nevertheless true that D.S. theory provides
valuable insight into many problems, facilitates their solutions and brings about
interesting results.
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INDEX

a-limit set 150 Diffeomorphism 3

Attracting set 13 Difference Equations 39-58
Attractors 13 Differential Equations 5-38
Asymptotic stability 100 Differential Operator D 19
Diagonalization 76
Discrete Systems 115
Bendixson-Poincare 151
Bernouilli equation 11
Bifurcation 195-210 Eigenspace 145
- of flow 195-200 Eigenvalues 69
- of map 209-210 - complex 69
- Flip 210 - real 69
- Fold 209 Eigenvectors 69
- Hopf 200-204 Elementary Catastrophes 232
- Pitchford 198 Equations
- saddle node 197 - Bernouilli 11
- supercritical 198 - characteristic 70
- sub critical 197 - difference 39
- transcritical 197 - differential 5
Biological control 293 - Lienard 155
Biology 280 - logistic 212
Blue Sky catastrophe 220 - Van de Pol 154
Equilibrium point 8
- Exchange of Stability 195, 196
Catastrophe Theory 226 - Feigenbaum number 214
- fold 232 - Floquet Theory 185
- cusp 233
Centre Manifold Theorem 187-191
Chaos 211-226 First return map 183
- in map 212-216 Flow 2
- in flow 216 Focus 102
Characteristic exponent 185, 186 Fundamental Matrix- 98
Characteristic equation 70
Characteristic polynomial 70 Gradient systems 163
Codimension 229 Growth models
Competing species 288 in Economics 178,258
Complex eigenvalues 93, 120
Conservative Hamiltonian
Systems 171 Hamiltonian flow 171
Cusp 233 Hamiltonian function 170
Cycle 149 Hamiltonian system 170-175
Hartman-Grobman Theorem 135
Homeomorphism 160
Degenerate 195,266 Homoclinic bifurcation 219
Determinants 65-67 Homoclinic tangle 218
314

Hopf bifurcation 200 Potential functions 163, 226

Horseshoe map 218 Prey-predator models 140, 285
Hyperbolic fixed point 136
Repeller 13
Implicit Function Theorem 195
Improper Node 104 Saddle loop connection 218
Idempotent matrices 81
Saddle node 197
Intermittency 217,218
Schwarzian derivative 212
IS-LM economic models 34, 107 Sensitive dependence on
initial conditions 217,218
Jordan canonical form 79 Silnikov Theory 221, 225
Singularity 195, 241
Lagrangian Dynamic System 167 Smale-Birkhoff 218
29 Smale horseshoe 218
Laplace transformation
Li-York Theorem 215 Splitting Lemma 228
Stabilization Control models 253
Liapunov
- characteristic exponent 221 Stability
- function 101 - asymptotic 159
- local asymptotic 100
- Second method 101
- stability 101 - global asymptotic 100
Liapunov-Smith reduction 193 - structural 160
Lienard-Smith reduction 193
Lienard system 155 Tatonnement Model 277
Limit Cycles 149 Transversality Conditions 248
Linearization theorem 134-146
Manifold 187, 188
Unfolding 229, 241
Map 157 Unimodal Map 212
Melkinov theory 219
Universal Constant: Feigenbaum 214
Maximum Principle 245
Morse set 245
Multiplier-accelerator models 54

Nilpotent matrix 87, 91

Normal forms 191
Nonhyperbolic fixed points 187,195
Nonlinear Systems 133-161

Optimal Control 245

Optimal Economic growth 258

Peixoto Theorem 160

Poincare-Bendixson Theorem 151
Poincare map 183, 184
Poincare section 183
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