An empirical analysis of consumption expenditure in china:A case study of changchun city

Abstract

This paper conducted a case study on Changchun-a city with 7.6 million populations located in the northeastern part of China-that analyzes consumer behavior in China. The empirical analysis is based on the AIDS model propounded by Deaton and Muellbauer (1980). The data used in this econometric analysis is a time series cross sectional panel data from 300-household survey responses collected from January 2009 to December 2011. The empirical results show that “food” and “education, culture and recreation” are necessity goods for the people in Changchun. These two items cover 44% of total expenditure share in the data set. At the same time, these two items are Giffen goods because their expenditure share increases even with rise in their prices. The findings suggest that “housing” is a luxury good but it is also a Giffen good. From this point, it is plausible to argue that the growth of real income across China in general and in Changchun in particular has been lagging behind the rise in prices of “housing”. Additionally the estimated own-price elasticity of demand in “education, culture and recreation” suggests that people in Changchun will spend more on these items in order to acquire a higher quality of education despite price increases. The estimated compensated cross-price elasticity of demand of various pairs of goods like “food and housing,” “food and education, culture and recreation,” “clothing and housing,” “clothing and medical” and others indicate that the theoretical assumption of a diminishing MRS does not hold for our data set. The analytical results show that people’s demand in “medical” is not being influenced by its price and people’s disposable income.