China's Dual Economy Aggregate Supply Analysis

Aggregate supply analysis is the core of short-run macroeconomics and also the main difference between New Classical Macroeconomics (NCM) and New Keynesianism Macroeconomics (NKM). The AS function in NKM means macro-policy such as monetary policy and fiscal policy is effective. But in NCM, for the rational predict and Lucas'AS functions, macro-policy is ineffective.Any AS function of mainstream macroeconomics has its micro-foundation, especially the labor market, but characters of labor market between developed countries and developing countries are different. Labor market in developing countries is often distorted and segmented. Developing countries have to consider whether the conditions meet the assumptions of macroeconomic theory, which is based on developed countries.As a developing country, China has significant features of dual economy, especially labor market segmentation, therefore the AS analysis of mainstream macroeconomics does not apply to China. This paper views the existence of wage-price markup and employment-output relation is questionable. And the implicit assumptions of Lucas AS function are also not exist in China.For the position of capital in China's aggregate production function is greater than labor force, and the fluctuation of capital is bigger than employment. This paper try to build an aggregate supply function based on capital movement, the comparative static analysis with the aggregate demand function revealed factors that influence output and price, and proved in experience analysis.From theory and experience analysis, this thesis explains reasons for China's short-term macroeconomic fluctuations, E.g. Cost of capital, the money supply, capital productivity and labor force supply. This thesis further recommendation a stable money supply and asset prices to stabilize prices, improve the distribution of income and livelihood will not lead to significant inflation, and technical innovation and structural transformation to improve output.