Research On The Effect Of China’s Urban Income Distribution Gap On Consumption Demand

China’s economic and social development12th Five-Year Plan proposed to establish a long-term mechanism to expand consumption demand, and take the expansion of consumption as a strategic focus on expanding domestic demand. It is evident that China’s domestic demand is significantly insufficient. And one important factor is the income distribution gap. So the economists are becoming more and more concerned about relationship between the income distribution gap and consumption.This paper attempts to study how inequality in income distribution influences the consumption through theoretical and empirical analysis from the perspective of China’s urban residents. And come to a conclusion that the widening inequality in income distribution is one cause of the lack of consumption demand. So consumption demand can be expanded to a certain extent by narrowing the income distribution gap.The framework of this article is as follows:The first chapter is the introduction, pointing out that the research background and significance of this article. Then review the former literature including domestic and international research. After that I put forward my own research framework and research methods as well as innovations and inadequacies. The second chapter is an overview of China’s urban residents in income distribution gap and consumption. The third chapter is a detailed analysis into the mechanisms of the gap in income distribution on consumption. The fourth chapter is empirical analysis about how the inequality of income distribution of urban residents impacts consumption. In order to test the relationship among the variables, I use the VAR model because the VAR model can handle this problem efficiently. The last chapter is conclusions and policy recommendations. Specific policy proposals are put up on the basis of the previous theoretical analysis and empirical verification.The innovation of this paper is mainly reflected in the following two aspects: First, this article combines the reality of China and western classical theory, trying to study how income distribution gap takes effect into consumption; Second, when using the VAR model, considering the per capita disposable income growth and price level, then establish a four-variable VAR model to measure the influence of the income distribution gap on consumption more accurately.