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.