linear approximation

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Approximation of an arbitrary function by a linear function. In economic theory, it is often used to make the solution of a complex equation or a system of equations describing an economic model analytically tractable. A typical example is linearization of a system of dynamic equations describing the behaviour of a model economy in the vicinity of a stationary, or a long-run, equilibrium. Another example is using a linear regression model in numerical data analysis. Mathematically, linear approximation is based on Taylor's expansion of a function when the terms of the order higher than linear are assumed to be negligible.

Subjects: Economics.

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