An Empirical Study On The Relation Of Residents’ Income, Income Gap And Consumption Of Henan Province

Consumption, investment and net exports are considered to be three forces that drive economic growth. However, as the financial crisis gradually spread from2008, which seriously affected China’s exports, in recent years the contribution of net exports to GDP is even negative. Meanwhile, China’s over-reliance on investment hasn’t been changed and the situation also persists in Henan Province. According to some relevant statistics of Henan Provincial Bureau of Statistics, the contribution of net exports made up negative66.73percent of the GDP of Henan Province in2012, and the contribution of investment made up108.4percent that is a lot higher than the percentage of consumption (58.29%), which reflects declining exports, over-reliance of investment and weakness in domestic demand in Henan. Therefore, since it’s difficult to improve the export environment and marginal contribution of investment becomes smaller and smaller, stimulating domestic demand and expanding consumption have become the main force to promote the economic growth of Henan Province. As the proportion of household consumption in final consumption is very large, then stimulating household consumption is becoming a priority. According to traditional economic theory, income is an important factor that affects consumption. Consumption increases as income does so and decrease as income gap expands. As a consequence, in order to promote the sound development of economy of Henan Province, it is of great importance to have a better understanding of the relationship of income, income gap and consumption.The research object of this paper is residents’ income, income gap and consumption of Henan Province. Based on both the absolute income model and the relative income model, the author first used relevant time series data from1978to2012and also the panel data from2002to2012to make an analysis of the relationship between residents’income and consumption of Henan Province, and to do some further research on the marginal propensity to consume with different income sources. Second, by analyzing the marginal propensity to consume of residents with different income levels and making use of both the relationship between Gini coefficient and average propensity to consume and the relationship between Ration of Income and average propensity to consume, the author figured out some specific influences of income gap on household consumption.According to the research, the author has got the following findings. First, a long-run co-integration relationship exists in the residents’ income and consumption of Henan Province, and income is the Granger cause of consumption. Second, different sources of income have different marginal propensity to consume and the marginal propensity to consume of property income and transfer income is higher, which indicates the two kinds of income contribute more to increasing consumption. Third, the residents’income level of different classes is negatively related to the marginal propensity to consume, and increasing income level of low-income residents helps stimulate consumption. Finally, the expansion of income gap will lead to the decrease of household consumption expenditure. In view of the above findings, the author came up with some policy suggestions.