The Income Gaps Impact on Consumption Of Beijing residents

Transcription

1 The Income Gaps Impact on Consumption Of Beijing residents Author: Botao Feng & Xin Zhou Supervisor: Mikael Möller C-level in Statistics, November 2009 School of Economics and Social Sciences Högskolan Dalarna, Sweden

2 Abstract We study the income gap and the consumption structure in Beijing. The methods used are a combination of longitudinal data and cross-sectional data. Gini coefficient and bad index (the ratio between highest income and lowest income) were adopted. Our study explains the characteristics of the present situation of consumption in different income groups. With regression analysis we show that the consumption is dependent on the income gap. Evidence shows that between urban residents in Beijing, the impact on consumer demand to the income gap has a significant negative correlation. This widens the income gap between people and does not increase the growth of consumer demand narrowing the income gap increases the consumer demand.

3 Content 1. Introduction Topics of the background Research purposes and significance Basic Theory Measure of income inequality index Equisection Method The Gini coefficient Measure of consumer demand Consumptive level Consumption structure Descriptive Analysis Income Gap Analysis The general description of Disposable income of urban residents The distribution of urban residents disposable income Trends in income gap change of urban residents Consumption Analysis (Average Propensity of Consumption (APC)) Compare consumption propensity of different income groups Comparison of the consumption structure of different income groups Preliminary conclusions Statistical Analysis Sample data selection model building Scatter graph Granger Causality Test The test of estimation model Economic sense test Statistic test Econometric tests Regression Analysis Conclusion and suggestion Conclusions and Implications Policy suggestion To improve the income level of urban low-income groups For different income groups take different measures to promote consumption References... 22

4 1. Introduction 1.1 Background Consumption is an important part of the economics; the research about consumption has always been a common field of research in Economics. Since the nineties, with the rapid growth of the market economy, Beijing citizen s income and standard of living has shown great improvements. People's consumption levels, consumer sentiment and consumption structure has faced significant changes. Meanwhile, in recent years with the industrial monopolies and other factors increasing, income distribution has faced a series of changes. Because of people s income growth are different, income disparities within the residents are increasingly prominent. For the Beijing s citizen, especially urban residents, income gap even more prominent. Experts pointed out that as the city's unemployment rate continued increasing, there is a serious unemployment problem, so that the group of urban unemployment has increased, forming a relatively poor group. The income gap between urban residents is far more serious than the income gap between urban and rural areas residents. The income gap also caused some change in consumption structure. The widening gap of income and significant changes in consumption structure is worthy of attention. 1.2 Research purposes and significance Among the many factors that affect consumer demand, the individual income is undoubtedly foremost factor. In many studies they formulate a basic assumption that the consumer is no difference. And use this assumption to study the relationship between consumption and income. That brings convenience to some analysis, but it will ignore the influence of different consumers to the total consumption. This kind of analysis is not comprehensive. The relationship between income gap and consumption is worthy for us to study. In view for this, this paper will select the urban residents in Beijing and find the affect that the income gap to the consumption. Combined with the previous research and the relevant theories, use the appropriate statistical analysis methods and mathematical derivation, through the empirical research and strive to get a better understanding of the income gap. And make effective policy choices to ensure sustained economic development. 2. Basic Theory 2.1 Measure of income inequality index There are several measurement methods of the income gap distribution. As the different point of view in analysis, each method also has its own scope, its advantages and disadvantages. The commonly measurement methods of general description of the gap in income distribution of residents are: halving method, the Gini coefficient, Lorenz curve, the relative average, Theil index and so on. This paper selected the 1

5 following main methods: Equisection Method Equisection method is a simple and clear way to express the income polarization. This method aims to focus on the analysis on income gap between the highest income and lowest-income residents of the income gap, while neglect on middle-income groups is more suitable to reflect the polarization of the situation. That is the gap between rich and poor. There is bisecting method, quartering method, quinquesection method, decile method and so on. One of the most commonly used methods of course ought to quinquesection method. Quinquesection method is that dividing resident to five equal parts, according to the level of average family income, then measuring the proportion of each part s income in the total income. Generally speaking, one part of highest income is high-income level; one part of lowest income is relatively-poor level. Use the ratio of highest-income families of the income share of the population and the lowest-income families of the population, to reflect the extent of the overall income distribution gap. It is called bad index of income. The minimum value for this index is 1, and the higher index, the larger the income gap The Gini coefficient The Gini coefficient is usually defined mathematically based on the Lorenz curve. The Gini coefficient is being used to describe household income inequality, its coefficient can range from 0 to 1; it is sometimes multiplied by 100 to range between 0 and 100. A low Gini coefficient indicates a more equal distribution, with 0 corresponding to perfect equality, while higher Gini coefficients indicate more unequal distribution, with 1 corresponding to perfect inequality. The coefficient following 0.2 is absolute mean; the coefficient from 0.2to 0.3 is compare mean, the coefficient from 0.3 to 0.4 is normal, and more than 0.4 is the state of alert, that from 0.4 to 0.5 f is large gap, that above 0,5 is extremely unreasonable gap and might be cause social unrest. 2.2 Measure of consumer demand Consumptive level Consumptive level is an aggregative indicator. In its narrow sense, it is meant to reflect the consumer demand extent for the quantitative aspect. In the broad sense, that emphasizes more on the quality of consumer goods. In sum, the level of consumption reflects satisfaction extent of the people's material and cultural needs, and the change may reflect the changes in consumer demand. It can represent the overall consumption of social and the development posture of economic. There are many indicators to measure the level of consumption. We usually use personal consumption expenditure, average propensity to consume marginal propensity to consume to denote the consumption level in China. They are 2

6 constrained by household income levels. The average propensity to consume (APC) is the proportion of the consumption expenditure in income; Marginal propensity to consume (MPC) refers to each additional unit of income caused by the increase in the amount of consumption Consumption structure Consumption structure is the proportion of different elements, different forms of consumer spending in total. It may reflect the changes of quality in household consumption, and rationalization extent of the inside structure. According to the actual content of people's consumption, the consumption are divided into food, clothing, housing, transportation and so on; according to the level of satisfying consumer demand, it can be divided into the survival consumption, the enjoyment consumption and the development consumption. According to forms of consumption, the consumption structures are composed of material consumption and service consumption. In this paper, according to the division of the State Statistical Bureau, the consumption expenditure of urban residents was divided into eight categories: food, clothing, household appliances and services, health care, transport and communications, housing, other goods and services. To examine whether the consumption structure is reasonable or not, we should examine changes in levels of consumption. The change of consumption structure s level can be reflected through the Engel's coefficient. Engel Coefficient refers to the proportion of income spent on food 3

7 Per capita disposable income Absolute Difference 3. Descriptive Analysis 3.1 Income Gap Analysis The general description of Disposable income of urban residents Beijing regional GDP (Gross Domestic Product) is relatively high and growing. Its economic situation and people's living standard is much better and higher than the national average level Figure 1 Comparison between Entire Country Beijing and national Beijing per capita Absolute disposable Difference Since the 90s, er capita disposable income of Beijing s urban residents continued to grow faster than the national average (Figure 1). (On the right of the picture the axis describe the absolute difference between Beijing and national income) 4

8 EC Figure 2 Comparison of the disposable income growth rate for Beijing and national residents. The growth rate of disposable income per capita in Beijing for urban residents is roughly same as the national average growth rate. In 1994, the growth rate reached a peak of 43.5%, and has since then declined. Since 2000, the income growth rate of urban residents in Beijing remained at 10%. In addition to 1992, 2002, 2007 and 2008, the income growth rate is higher than the national average growth rate (Figure 2). BJ 5

9 3.1.2 The distribution of urban residents disposable income Following the quinquesection method, dividing the residents into five equal groups is that: the lowest income households (20%), lower-income households (20%), middle-income households (20%), higher income households (20%), and the highest income households (20%). We then calculate the income proportion for each group (Table 1). Thus we can analysis the distribution of urban residents income. year Table 1 The distribution of disposable income of Beijing residents (unit: %) Lowest Income / gross income Lower income/ gross income Middle income/ gross income Higher income/ gross income Highest income/gross income % 17.14% 19.33% 21.92% 27.20% % 16.63% 19.02% 21.60% 29.03% % 15.38% 18.24% 22.63% 31.52% % 15.43% 18.82% 22.97% 30.88% % 16.69% 19.30% 21.70% 30.17% % 16.50% 18.78% 21.83% 29.34% % 16.42% 18.70% 21.95% 29.94% % 16.34% 18.90% 21.87% 30.44% % 15.78% 18.89% 21.87% 31.29% % 15.15% 18.64% 22.06% 32.32% % 15.01% 18.59% 22.21% 33.80% % 15.78% 18.58% 22.14% 32.34% % 15.10% 18.03% 22.40% 34.15% % 14.47% 18.00% 22.52% 34.40% % 15.05% 18.51% 22.47% 33.08% % 14.54% 18.48% 22.75% 33.87% From the table it is seen that every year the high-income household s has more than 50% of the total income. Over time the income gap, between high and low income groups, has widened. The income growth rate in the higher income groups is higher and in lower income groups is lower.(the table does not show that) The proportion of highest-income household income to total income increased from 27.2%(1992) to 33.87%(2007). On the contrary, the proportion of the disposable income of the lowest income households to total income has shown a clear downward trend from %(1992) decline to 10.37%(2007). 6

10 Proportion 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Lowest income Gross income Highest income Gross income Figure 3 The income distribution of high and low income groups of Beijing residents From Figure 3, it can be seen that two curves from top to bottom is the highest proportion of revenue line (ZGSR / SR) and the lowest proportion of revenue line (ZDSR / SR). The disposable income gap of urban residents is widening. And the 20% of the income share of the lowest income group decreased. On the other hand 20% of the income share of the highest income group increased. Hence the income gap of low and high income groups is growing Trends in income gap change of urban residents We first use the bad index to measure the income gap between urban residents in Beijing Bad index Figure 4 The bad indexes of Beijing residents In 1992, the highest income group increased their disposable income with 2959 Yuan and the lowest income group with 1368 Yuan. In 2008, the corresponding figures were increased to 47,110 Yuan and 10,681 Yuan. However, the bad index shows a widening gap over the years. In 1992 bad index is 1.89, and in 2008 the bad index expanded to The widening income gap between urban residents is easily seen in Figure 4. 7

11 Secondly we use the Gini coefficient Gini coefficient Figure 5 The Gini coefficients of Beijing residents According to the Gini coefficient, as shown in Figure 5, there has been an increase in the unevenness of the disposable income. However,the Gini coefficient of urban residents in Beijing is low; the range is basically between 0.13 and 0.3. It indicates that the overall income distribution is still at a relatively reasonable range. Before 2004, except 1995 and 2003 which have shown a certain decline, the Gini coefficient has an upward trend. Since 2004, the Gini coefficient has a downward trend. But compared with previous years the value is still high. This shows that the income gap between Beijing urban residents is decreasing. But note that statistical data usually miss illegal income and gray income. It is noteworthy that in 2006 compared to 2007, the Gini coefficient was smaller, but the bad index was larger. This may be a reflection by the government s policy-related decisions to narrow the gap between rich and poor. More importantly, as the economy continuously develops, the middle-income segment of the population is constantly growing. This to some extent reduced the Gini coefficient. Andthe bad index is more focused on the gap between rich and poor, because it neglects the middle-income groups. Generally, the income difference of the urban residents in Beijing is modest. It is still within reasonable limits and not so polarized. But, the growing income gap is an indisputable fact. 8

12 3.2 Consumption Analysis (Average Propensity of Consumption (APC)) Compare consumption propensity of different income groups We divide the income between urban residents in high, medium and low level. For example, in 2007 the average consumption of Beijing urban residents was 0.7. From the average consumption, of all income groups, (figure 6) we see that the average consumption decrease as income levels increase. In low-income households, the average propensity to consumption is higher, while in high-income households, the average tendency to consume is less. Figure 6 The APC trends of all income groups of Beijing in 2007 High-income class income levels are too high, more than it needs; most of the income is simply not spent. So additional income will not be used for consumption, the marginal propensity to consume is very low. As the income gap expansion the uncertainty about the future is gradually increased, which would affect the expected of high-income group, may be their expected in the future situation will worse than current situation. This could lead them to save more to prevent future tragedies. So the marginal propensity to consume is even lower. Low-income group has a consumer desire; the majority of their income increment will be used to increase the purchase of consumer goods. The marginal propensity to consume is high, but a lack of ability to pay. With the expansion of income gap, low-income group s consumer expectations change, they found it impossible to catch up on the high-income class. At the same time, they also see the uncertainty of future income; it also increased their propensity to save money, marginal propensity to consume show a downward trend. If the high-income household income improves, low-income households income reduces, the income distribution gap continue increase. Then the total average 9

13 consumption of urban residents tends to fall, affecting the total increase of consumer demand. It s not conducive to the promotion of economic development. groups Comparison of the consumption structure of different income Different income groups, their content of consumption and its composition is different. In normal circumstances, the lower income levels, individual will spend more on survival consumption. The higher income levels, individual will spende more on then communications, entertainment services, the development of education. For a more intuitive way to see the different income groups spending characteristics and differences consumption structure, we using the 2007 cross-sectional data (Table 2), from consumer spending construction analysis of the residents of different income levels consumption structure features: program Table 2 All income groups composition spending in 2007 Low income medium income High income Spending (rmb) structure (%) Spending (rmb) structure (%) Spending (rmb) structure (%) structure gap spending food clothe living Household equipment Healthcare Transportation and communication Edutainment Other commodities

14 Comparison of survival consumption Figure 7 The proportion of survival consumption of Beijing residents in 2007 As it can be seen, the food expenditure of urban residents in Beijing is still the most important consumer spending item. Meanwhile, residents of different income levels of consumption in the four areas also have focused on the following features: Between high and low income households the food consumption expenditure gaps are most prominent. The proportion of food consumption expenditure with increased income levels shows a marked downward trend, which is in line with the Engel's law expression. The lowest income households and the highest income households Engel's coefficient is quite different, 40.6% and 25.9%, a difference of 15 percentage points. In accordance with the evaluation criteria of Engel's coefficient (Engel's coefficient at 59% or more for the poor, 50-59% for food and clothing, 40-50% well-off, 30-40% for the wealthy, less than 30% of the most affluent), in 2007 even the lowest income households has been basically well-off, while the highest income households has reached the richest standard. All income groups in consumer spending in the clothing are basically about 10% of the revenue. As income increased, the proportion of clothing expenditures showed that first rising and then decline. The middle-income households have the largest proportion of expenditure on clothing. In fact, similar to food consumption, dress is necessary to residents, but not in an infinite expansion. Therefore, even if the income levels continue increasing, people will not spend more money to buy clothe. For all income groups live consumption spending in these four consumptions is the lowest. Middle-income households have the lowest spending, with the highest income households by 2.5 percentage points difference, the difference is not 11

15 particularly evident. Overall, as incomes increase the spending in this area shows an upward trend. Along with the income increase, residents in the transportation and communications expenditures show a very clear upward trend; high and low income groups spending in this area have great differences, up to 7 percentage points. Most of this difference is relatively easy to understand, because the transportation and communication expenses are biased towards the development of type of spending projects that can reflect the standards. The traffic has different modes (such as bicycles, public transport, private cars, trains, planes, etc.) have the great difference in cost, so that this expenditure will increase along with income levels Compare the development enjoyment consumption expenditure Figure 8 The proportion of development enjoyment consumption of Beijing residents in 2007 As can be seen in the development enjoyment consumption expenditures, all income groups in the education and entertainment expenditure is the highest. Household appliances and services, entertainment, education and cultural services and other goods and services expenses were as incomes increase the proportion has a gradual upward trend. Because these four kinds of consumer spending and the proportion they take is a direct reflection for the standard of living. In the proportion of health care spending, the income levels at both ends show a lower trend in the middle show a higher trend. Middle-income families in this area have the highest proportion of the expenditure. But the overall expenditure does not have greatly difference. It is because health-care spending as a necessity expenses, they must spend a certain percentage of their income for the health care. 12

16 Preliminary conclusions Gini coefficient APC Figure 9 Compare the trends of Beijing s urban residents APC and the Gini coefficient Through the above data we can get three conclusions: The Beijing urban residents are better off, but didn t achieve common prosperity. The rapid economic growth makes Beijing residents become rich. Compared with the nation, since 2000 Beijing urban residents per capita disposable income average growth rate has been basically stable at 10%, which is higher than the national average growth rate. But the income distribution is unequal, not all of them share the benefits from economic growth or shared to different degrees. The income gap within urban residents was gradually expanded. At present, the income of urban residents in Beijing focused on high-income groups, urban residents has been formed different levels of income. The overall income gap is widening, and will have further expansion. Income disparities expansion, the overall consumer demand decline From Figure 9, the consumer demand (APC) and income disparity (Gini coefficient) negative related. We can see that the average propensity to consume diminishing. The overall consumption demand of urban residents is constantly reduced, which directly affects the overall consumer demand in Beijing. On high-income class, t the proportion of life necessity goods consumption in total consumption is low, so the marginal propensity to consume is low. At the lower income class, the majority of their income use to buy basic life necessities goods, a small part of the income use to buy durable goods. Solow-income households have higher marginal propensity to consume. This is verified by the expansion of the income gap of urban residents will reduce the marginal propensity to consume, thus driving down the social average propensity to consume. Each income group form different consumption characteristic 13

17 The lower incomes levels spend more in survive consumption. The higher income levels use for the enjoyment projects consumption is higher. For high-income families, their basic necessities consumer demand has been met, the purchasing power surplus, consumption levels are relatively stable. For middle-income families, the food and clothing has also not been an issues. But in two areas, housing and Traffic due to price, quality, income level and other reasons lack of purchasing power and purchase intentions. For low-income families, although have a higher propensity to consume. But because of a slow increase income, consumption structure still remains in the food and clothing and other basic consumption. In this way, the different levels of income caused the different consumption structure. So that the structure changes in low-income and middle-income consumer is difficult to keep up with high-income strata changes. Thus consumption structure chasm has emergence. Overall, in the area of consumption structure, the income gap will be restricted new economic growth point formation. 4. Statistical Analysis From the above analysis, we understand that the income gap between urban residents in Beijing has undergone a dramatic expansion of the trend, the average propensity to consume has been a downward trend since 1990s. Marginal propensity to consume in high-income class is low, marginal propensity to consume in low-income class is high. High income group occupy the absolute superiority in urban income. The lower marginal propensity to consume will bring down the average propensity to consume of the whole town and then constrained the overall consumer demand. Therefore, we need find out to which extent the income gap will lead to a downward trend in consumer demand represented by average consumption of urban residents. In the following sub-section, we will carry out econometric analysis on the impact income gap of urban residents in Beijing city on consumer demand, and establish functional relations between income gap and consumption expenditure. 14

18 4.1 Sample data selection Choose to use the average propensity to consume (APC) to reflect the resident's consumption demand conditions, the indicator data is calculated(apc = per capita consumption expenditure / per capita disposable income). The Gini coefficient is an important indicator as a measure of income gap of urban residents. year Table 3: The data of the Gini coefficient of urban residents of Beijing and consumer expenditure from year1992 to 2007 per capita consumption expenditure per capita disposable income average propensity to consume (APC) Gini coefficient(g) model building From the above analysis we see that there is a close relationship between the income gap, as measured by the Gini coefficient, and consumption expenditure. To understand the specific relationship through the relationship maps and the causal relationship test of two variables to determine the level of household consumption. 15

19 4.2.1 Scatter graph From the figure, we know the average propensity to consume APC with the Gini coefficient G of basic linear relationship between the APC and Gini coefficient and establish the linear regression model between them. Figure 10: The relationship between APC and G Granger Causality Test Using the variable G and APC to make first-order, second-order Granger Causality Test, the result is that: Table 4: The result of Granger Causality Test between APC and G Lag-len gth 1 2 Granger causality F P Decision G is not reason of APC APC is not reason of G G is not reason of APC APC is not reason of G Rejection No rejection No rejection No rejection From Granger Causality Test, we can know that there is one-way causal relationship between average propensity to consume and Gini coefficient, at the level of significance 0.1. To reject "G is not reason of APC",and do not reject APC is not reason of G. Hence, from the first-order, the change of income gap (Gini coefficient) is the reason of the change of consumer spending (average propensity to consume). However, the change of consumer spending is not the reason of the change 16

20 of income gap. Hence, according to the data that Gini coefficient and average propensity to consume of Beijing resident from 1992 to 2007, establish linear regression model. To assume that relational expression between APC and Gini coefficient: APC G 0 1 Using OLS simulation model parameter estimation, the result is that: APC = G (33.39) (-7.08) R R F DW The test of estimation model Economic sense test Model estimation results show that the Gini coefficient G of the regression coefficient was negative. This shows that there is a negative correlation between the income gap of urban resident and consumer demand of urban resident. When Gini coefficient of Urban adds every unit, the average propensity to consume will decline by units. That shows with increasing of the expansion of urban income gap (Gini coefficient), the average consumption of urban residents tended to decline, that in consumer demand declined. In other words, the expanding of urban resident income gap is the extreme important reason to lead to a downward trend of urban household consumption and weak demand growth of consumer demand. This judgment theoretical analysis and practical experience is consistent Statistic test Testing goodness of fit: We can know that from the data in the table: R , modified coefficient of determination R , those results are greater than 0.7. That shows the model fits the sample well, we believe that the average propensity to consume can be explained by independent variable (Gini coefficient) in the regression equation, the regression equation pass examining. F test At level of significance equal to 0.5, we can know that from Model Estimation Results F (, 115) That mean the model pass the F-test and the F 0.05 Regression equation is significant. There is the significant correlation between income gap of urban residents and urban consumer demand. 17

21 T test Let : 0, at level of significance α=0.05,check t distribution table with H0 1 degree of freedom n-k=15, critical value n k) t (15) From the Model t ( estimation results, we have T-value is Its absolute value is greater thant So, we should refuse the original hypothesis. That indicates the (15) income gap indeed impact on consumer demand of residents Econometric tests Heteroscedasticity Test White test result Table 5: white test Obs*R-squ ared P-value From White test result, we have White statistics nr the value is less than critical values (2) 5.991(at 5% level of significance and 2 degrees of freedom), and therefore we do not reject the same variance assumption, that means the model does not have Heteroscedasticity. Serial correlation test From the DW test, we have D 0.98, D 1.54 (at level of significanceα=0.05, L n=16,k=2). D U 1.54 < DW=1.56<4- D U =2.46, we can have the conclusion that there is no serial correlation. U 4.4 Regression Analysis From regression results between Gini coefficient and the average propensity to consume, we can have show that the income gap of Beijing resident has a negative impact on average consumption level of the cities and towns. Both showed a significant negative correlation. The widening income gap of residents is a very important reason for leading to consumption of urban residents declined in growth, and sluggish consumer demand. Consumption demand is the main driving force of economic growth, the widening resident income gap will be restricted by the growth of consumer demand, and lead to a weak economic growth. Hence, if we want to expand consumption demand of urban residents of Beijing, we must attach 18

22 importance to regulation of the distribution of income of urban residents and narrow the income gap to achieve the increase in consumer demand. 5. Conclusion and suggestion 5.1Conclusions and Implications Through descriptive and empirical analysis we reached the following conclusions and ideas: Through National disposable income with the horizontal comparison, we know that Beijing urban residents have an overall high income level. But it is worth noting that the income distribution imbalance is an outstanding problem. High-income urban residents raise the proportion of total income but their marginal propensity of consumption is very low. On the contrary, a higher marginal propensity to consume for low-income, middle income groups the proportion of revenue has been declining. Therefore, the social wealth keep concentration to the rich minority, which will lead to a whole society the marginal propensity of consume reduced, and make the growth of consumption cannot keep up revenue growth. There is a sign of sluggish consumption and economic growth. Through comparison of longitudinal dynamics history, as well as the year 2007 static analysis, we know that the income gap of urban residents in Beijing have shown a widening in the overall income gap, and have a further expansion trend. At the situation that low-income urban residents is low and income gaps widened, consumption demand reduced. All income groups have developed different consumer demand. Differentiation in income levels result in differences in consumption structure, the income level of low-income is still difficult to adapt to changes in consumption structure of high-income groups. To some extent, that will affect the new economic growth point of the formation andrestrict the increase of consumption. Empirical analysis shows that there is a significant negative correlation between income gap of Beijing residents and consumer demand. The widening income gap is not conducive to the increase in consumer demand. If the distribution of income is irrational, the income gap is widening, will lower the average propensity of consume and directly affect the internal driving force of economic growth. Hence, if we want to increase consumer demand, we should narrow the income gap. And we must attach importance to the regulation of income gap of residents. Through analysis, we recognize that, for different income groups to increase the same amount of income, the effect of the expansion of consumption is different. To make people increase their income, who are low-imcomer inthe higher marginal propensity of consume it will bring more increment of consumption, At the backdrop of Income gap between gradual expansion, in order to further expand people's consumption demand, it is very important to increase low-income families, especially low-income in the income of poor households and regulate the income of high-income earners. 5.2 Policy suggestion 19

23 Based on the above understanding of the relationship between the income gap and consumption, we know that the income gap expansion of economics is not only the efficiency and equity issues, but also relation with final consumption demand of residents, as well as operation of the entire national economy. To improve the propensity to consume of urban residents of Beijing and expand consumer demand, we should start to narrow the income gap To improve the income level of urban low-income groups Compared to the national average, the current income level of Beijing residents is high. Therefore, stable and rapid economic development should be secured, and then narrowing the income gap of Beijing residents should be on emphasized, especially on low-income groups. The largest proportion of the population is middle school level of education and cultural groups (by the end of 2005 accounted for 57.3%), the biggest proportion of age is middle and older aged. The largest occupational group is workers. To concern and improve the income of these people, it is of great significance to alleviate the income gap, and to maintain social stability. Therefore, raising a large proportion of low-level income can narrow the income gap effective. To adjust unreasonable gap between high and low income groups The main task of Personal Income Tax is to regulate the distribution of income and achieve social equity. The tax base should be primarily high-income households, rather than the low-income people. To adjust personal income tax, raise the personal income tax and the progressive tax rates apropos, increase the incidental income tax rate. The current standards for a tax deduction, making a lot of middle-income workers, even low-income persons have a personal income tax, which affects their income levels, consumption levels. To speed up the improvement of tax laws and regulations, establish and improve personal income declaration system. Then, make a variety of income tax authorities as much as possible into the monitoring system, rationalize the high-income. Taking into account the illicit enrichment is the one of the main reason to lead to income gap and therefore strengthen the legal and administrative punishment on illegal operators and officials of corruption and impose severe penalties to prevent abnormal expansion of the income gap. To protect the basic livelihood of low-income earners We should increase transfer payments and the gradually establish of the basic livelihood of low-income groups, consumer directed system of subsidies to the urban poor to increase direct social welfare assistance. Because propensity to consume of the poor is high, increase their direct social welfare assistance, you can maximize government transfer payments to the multiplier effect in stimulating consumption. At the same time, due to low-income groups tend to higher precautionary savings, it will result in a lower overall propensity to consume. Therefore, increasing investment in education for low-income, increase employment opportunities for low-income urban areas and reduce their exposure to risk is an effective means of consumption to increase the income of this group 20

24 5.2.2 For different income groups take different measures to promote consumption For low-income consumer groups, to further strengthen the urban social security system from improve their buying power, ensure that basic living expenses for laid-off workers and the basic pensions for retirees paid in full, implement minimum livelihood guarantee system for urban residents; to convert these subsidy to spending power of low-income effectively through the tax transfer payment with appropriate assistance. For middle-income consumer groups, to protect their effective demand and release of their purchasing power. This part of people's spending is in from the well-off to rich type. From consumption, it is consumer demand the quality of transition. To foster new consumption hot spots actively by improving the consumption environment, expand consumption to tap their potential consumer demand. For high-income consumer groups, the government should protect their legitimate income. Adjust product structure actively, increase efficiency, innovative products and the supply of investment goods. Especially to increase the supply of services to meet a higher level of consumption requirements, so that these people consumer demand transfer into savings or investment demand. 21

25 6. References Alex Dong(2005). Income empirical analysis on factors on the impact of consumer demand in China. Economic Theory and Economic Management press. Issue 2 Chen Jinlong and Li Poling(2007). The study on relationship between Chinese income gap and consumer demand contemporary economic management press. PP Chen leyi(2003). The income gap and the consumer demand. Chinese Economic Times press. PP Di Wenshu(2005). Chinese urban income gap impact on consumption. Inner Mongolia Science and Technology and Economic press. PP Gao Hongye(1996). Western economics. China Economic Publishing House press Guo Xinhua and Wu Zaihua(2006). Study on the income gap of urban residents and r impact on consumer demand. statistical observations press. Issue 4 He Wentao and Wang Jingtao(2004). Analysis on expansion of the correlation Chinese income gap and consumer demand, consumer economy press. PP Huang YingHui(2004). Research on income gap among urban residents in Chongqing, Southwest University of Finance Press. PP Kong Xinxin(2004). The impact of changes in trend of Chinese income gap, contemporary economic science press. PP Li Haitao and Jin Yu(2003). Analysis the income gap impact on consumption structure, statistics and information forum press. PP Li Jun(2003). The quantitative analysis on the income gap impact on consumer demand the number of economic and technological Economic Research press. Issue 9 Liu Lanfang(2003). Institutional changes in transition make income gap effect on consumption in Beijing, consumer economy press. PP Li Xue,song mei(2005). Chinese urban income gap between the impact of dynamic effects on consumption analysis. Liu ying(2007). Empirical analysis on income distribution s impact of consumption structure of Chinese urban residents. Science and Technology Review press. PP Min Ji Quan(2005). The empirical research on the income gap of urban residents consumption patterns affect, technical and economic press. PP Yuan Jianwen(2007). Econometrics Test Guide. Science Press. PP Yang Liu and Jihong(2008). Study on Chinese income distribution in Beijing. Capital University of Economics Press. PP Sun Lei(2007). Empirical analysis on Chinese income gap of urban residents impact on consumer demand, capital University of Economics press. PP