An Impact Study Of Factor Price Distortion On The Imbalance Of Aggregate Demand Structure In China

China’s economic system reform has created the miracle of growth, but it produced many problems. One of the long-standing problems is the market distortion. With the cancellation of dual pricing system, product market distortion was gradually disappearing, yet market segmentation still existed. Due to market imperfections, sub-optimal allocation of production factors emerges,further resulting in the factor price distortion. The factor price distortion affects consumption, investment and export via the price mechanism, and it changes the corresponding behavior of economic subjects, leading to the imbalance of aggregate demand structure.This paper, on the basis of production function,starting with the analysis of time series data and provincial panel data, measured the three important factors of absolute and relative production price distortion: labor, capital and energy in national and provincial, ranging from 1992 to 2013. VAR model and Panel VAR model were established then to analyze the effect of the imbalance of aggregate demand structure.The findings indicate that price distortion presents different declining trend in all the three factors, among which the capital price distortion is of the highest level, followed by energy and labor. In addition, the impulse response of VAR model and Panel VAR model reflects different knock-on effects of factor price distortion on aggregating demand structure during different times. The factor price distortion exerts a negative influence on consumption while a positive influence on investment and export. The relevant influence of factor price distortion finally leads to the imbalance of internal demand structure manifesting in deficient consumption and external demand structure manifesting in exporting too much. Therefore, based on the above analysis, this thesis suggests further improving the factor market price formation mechanism, so as to change the imbalance of aggregate demand structure caused by the factor price distortion and realize the macroeconomic rebalance.