An Empirical Study On Income Distribution Effects On Domestic Demand Of China

Since the reform and opening up, the residents' overall income levels are rising rapidly with China's rapid growing economy. Living conditions and living standards are greatly improved both in urban and rural areas. At the same time, the income distribution gap is widening day by day, and it has been got a lot of attentions all over the society. Compared with the beginning of the reform and opening up, the income gap in urban and rural, regional and industry is much wider than 30 years ago. As we know, income is a direct factor of consumption and investment, if the income distribution is also related with the domestic demand? The solutions of these issues are important to stimulate our consumption and boost our economic growth.On the base of review and summary of different income distribution and domestic demand theories, the article summarizes the mechanisms between the growing income distribution gap and consumption and investment. The widening gap of income distribution will affect the marginal propensity to consume, savings, the number of low-income groups, and consumer psychology, all of above will have negative effects on consumption; the widening gap of income distribution will also have negative effects on investment through influencing market expectations, the investment multiplier, etc. but on the other hand, the widening gap of income distribution may also have some positive impact on the investment through savings. Therefore, the overall effectiveness on the investment needs to be further verified.In the empirical, the paper measured the relationship between income distribution and consumption, and investment, and domestic demand structure separately. Through a panel data model, we found that there is a significant negative effect on consumption and investment with the widening income distribution gap. The effects are different in three regions, the eastern region is mostly affected on consumption and the western region is mostly affected on investment, the middle region is affected the least both on consumption and investment. In addition, a series data test was made to measure the relationship between the widening income gap and the structure of domestic demand. The results showed that the widening income gap is not conducive to optimizing the structure of domestic demand.According to the empirical results, a series of specific policy recommendations were proposed, such as increasing the level of aid to poor, making better social security for low-income people, increasing the incentives for middle-income class, and also adjusting the great high level income, thereby to stimulate our domestic demand and economic growth.