The Empirical Study of Relationship between Marginal Propensity to Consume and Income in China

In late 2008, the financial crisis had a huge impact on the economy of the world. In order to keep the rate of growth, the Chinese government has made an economic stimulus package plan to invest 400 thousand millions (RMB) into the domestic market. However due to the low marginal propensity to consume (MPC), the multiplier effect of government investments is also in a low level. A crucial way to speed up the economic recovery is raising the amount of the consumption. Using the household income-consumption data of CHNS and applying the nonparametric local polynomial regression, we got the marginal propensity to consume of China. As a whole, the MPC is positively related to the income of the household while the overall MPC is relatively low. We also disclose the changing directions of the MPC in different household income levels. Especially we find the relation of the MPC and the income is like "inverted u-curve" for those households whose income are less than 50 thousand (RMB). Finally we present some feasible advices for China on how to improve the consumption in order to avoid the huge negative impact from the economic recession.