TEach of these three equations is a

TEach of these three equations is a type of difference equation. In its most generalform, a difference equation expresses the value of a variable as a function of itsown lagged values, time, and other variables. The trend and seasonal terms are bothfunctions of time and the irregular term is a function of its own lagged value and ofthe stochastic variable t. The reason for introducing this set of equations is to makeAlthough forecasting has always been the mainstay of time-series analysis, thegrowing importance of economic dynamics has generated new uses for time-seriesanalysis. Many economic theories have natural representations as stochastic differenceequations. Moreover, many of these models have testable implications concerning thetime path of a key economic variable. Consider the following four examples: