Abstract
Examines empirically the effects of the rationing system, open inflation
and budget deficits on rural and urban consumption behaviour in mainland
China. Employs a dynamic error‐correction model. Estimates the model by
ordinary least squares (OLS) based on annual data for the period
1952‐1991. Employs a Chow test to test for structural changes in rural
and urban consumption. The empirical results show that an income
variable captures the distribution effect of rationing and has a
significant impact on rural and urban consumption. Open inflation tends
to underestimate inflationary pressure and has no impact on consumption
in rural and urban areas, whereas per capita budget deficits show a
significant influence on rural consumption. The results of the Chow
test indicate that economic policies and reforms have significantly
changed the structure of consumption since 1979. One such change is the
shift in the relative importance of consumer durable goods in total
consumption than equal to, or smaller than that under the tariff. This
conclusion holds for both price‐setting and quantity‐setting duopoly
with heterogeneous goods as well as quantity‐setting duopoly with
homogeneous goods.