Not a whole lot of theory, really.
Difference Equations are concerned with DISCRETEchanges in a variable over time.
Differential equations were a continuous change, differenceequations look at data which is reported only once a timeperiod.
For example, lags
if you had a lagged variable in a model,then it·s rate of change over time would be modelled by adifference equation.
A typical difference equation looks like:
= a + b
We call such a difference equation a first orderdifference equation because it only goes back oneperiod.