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I often see code like <update handle='xy' /> in layout files.

vendor\magento\module-sales\view\frontend\layout\sales_email_order_items.xml

<?xml version="1.0"?>
<page xmlns:xsi="http://www.w3.org/2001/XMLSchema-instance" xsi:noNamespaceSchemaLocation="urn:magento:framework:View/Layout/etc/page_configuration.xsd" label="Email Order Items List" design_abstraction="custom">
    <update handle="sales_email_order_renderers"/>
    <update handle="sales_email_item_price"/>
    <body>
        ...
    </body>
</page>

What is the purpose of it?

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The update layout directive is a way to include another layout handle in your page.
In the example you provided, in the layout sales_email_order_items the layout handles sales_email_order_renderers and sales_email_item_price are loaded.
This is useful if you have multiple pages with similar structures of blocks.
You out the common blocks structure in a separate layout file and you load it in multiple places.
This way you avoid configuration duplication.

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