The Impact of Income Inequality on Consumption Demand of Urban Residents in Zhejiang Province

In the context of global economic recession, China´s exports show a sharp decline, so it´s being highly concerned that how to expand domestic consumption demand and maintain steady economic growth. Among the influencing factors of consumption, how will the expansion of income inequality affect domestic consumption? What policies should be carried out to adjust present income inequality in order to promote consumption demand? Using Zhejiang provincial data of urban residents´ income inequality and consumption demand, this paper investigates their relationship through cointegration analysis and then sets up error correction model (ECM) to reveal their dynamic relation. Based on the Granger causality test in ECM, this paper shows that income inequality is negatively related to consumption demand in long term, and thus narrowing urban residents´ income gap is an effective way to overcome the problem of insufficient domestic consumption demand.