IGNOU BECE 142 2025 2026 - Explain with illustration the computation process of fixed effect esti

Question

Explain with illustration the computation process of fixed effect estimation method.

10 Jan 2026

Answer :

Word Count : 292

The fixed effect (FE) estimation method in applied econometrics is used to control for unobserved heterogeneity when this heterogeneity is constant over time but varies across entities, such as individuals, firms, or countries. The main idea is to remove the effect of time-invariant characteristics so that the estimated coefficients reflect the impact of the explanatory variables more accurately. The computation process starts with a panel data model: ( Y_{it} = \alpha_i + \beta X_{it} + \varepsilon_{it} ), where ( Y_{it} ) is the dependent variable for entity ( i ) at time ( t ), (

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