An Empirical Analysis of the Consumption Function of China's Rural Residents

This paper conducts an empirical test on John Keynes's Absolute Income Hypothesis and Milton Friedman's Lasting Income Hypothesis using the published statistical records of Mainland China between 1981 and2007. Then we set out to propose an econometric model for the consumption issues of China's rural residents. The results show that the peasants' current income is the essential factor influencing the rural residents' consumption. An excessive wealth gap produces a negative effect on the growth of consumption and domestic demand. The paper also demonstrates that price hikes can alter the residents' price expectations and can motivate consumption slightly rather than essentially.