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Unformatted text preview: A Tutorial on Simple First Order Linear Difference Equations (for Economics Part I Paper 3) Corrections to Dr Ian Rudy (http://people.pwf.cam.ac.uk/iar1/contact.html) please. An example of a simple first order linear difference equation is: 1800 2 1 = +- t t x x  The equation relates the value of x at time t to the value at time ( t-1). Difference equations regard time as a discrete quantity, and are useful when data are supplied to us at discrete time intervals. Examples include unemployment or inflation data, which are published one a month or once a year. Difference equations are similar to differential equations, but the latter regard time as a continuous quantity. Equation  is known as a first order equation in that the maximum difference in time between the x terms ( t x and 1- t x ) is one unit. Second order equations involve t x , 1- t x and 2- t x . Equation  is known as linear, in that there are no powers of t x beyond the first power....
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- Fall '10