Scale Measurement of and Linkage between China's Domestic and External Demand

【Authors】

ZHANG Shaojun & DING Xiaoqiang

【WorkUnit】

【Abstract】

To construct a new pattern of development, it is essential to “prioritize domestic demand expansion as a strategic starting point and expedite the establishment of a comprehensive domestic demand system”. At a State Council meeting on strengthening the domestic market, Premier Li Qiang stressed that strengthening the domestic market is the strategic foundation for development, recognizing domestic demand as the driving force and internal flows as the distinctive advantages of a major economy. However, the measurement of domestic and external demand scales and their regional and sectoral disparities remains critical for expanding the scale of domestic demand and cultivating a complete domestic demand system, which will facilitate the creation of a new pattern of development. 
This study constructs an accounting framework for domestic and external demand. Using the Dagum Gini coefficient decomposition method, the kernel density estimation method, and a coupling coordination degree model, it systematically analyzes China’s domestic and external demand scale from 1987 to 2017. The main findings are as follows. First, domestic demand consistently exceeds external demand in both scale and growth rate, and external demand exhibits significantly higher interprovincial and cross-sectoral disparities in scale, playing a greater role in some provinces and sectors. Second, there is a gradient effect in the scale distribution of domestic and external demand in provinces and sectors, and the gradient effect of the scale distribution of domestic demand is more obvious than that of external demand. It reflects that China has great potential for domestic and external demand, and the potential to expand domestic demand is greater. Third, the industrial sector accounts for more than 50% of the total demand. This indicates that the main positions of China’s domestic and external demand are in the industrial sector, which provides a solid foundation for “keeping the proportion of manufacturing basically stable”. Fourth, on the whole, the coupling and coordination level of China’s internal and external demand is not high, with severe provincial and inter-sectoral divergences, indicating that China still needs to accelerate coordinating domestic and international markets and strengthen the linkage between internal and external demand.
This paper contributes to existing literature in three ways. First, the concept of domestic demand is defined from the perspective of the demand object. Then based on the input-output model, the accounting framework was proposed for domestic and foreign demand scale, enriching the existing measurement indicators. Second, using the Dagum Gini coefficient decomposition method, kernel density estimation method, and coupling coordination degree model, we systematically examined the spatial differences and linkage of domestic and foreign demand scales in China. Third, we explored the characteristics of domestic and foreign demand scales in different regions and different industrial sectors. This can provide support for formulating scientific and feasible policies to expand domestic demand.
Our findings yield four key insights. First, we should deepen economic ties among regions and sectors and cultivate a complete domestic demand system. Second, we should effectively coordinate efforts for supply-side structural reform and demand-side management and establish a sustainable mechanism for expanding domestic demand. Third, we should improve the regional coordinated development strategy and narrow regional disparities in domestic demand development. Fourth, we should strengthen systems and mechanisms and smooth the channels for boosting internal and external demands in a coordinated way.

JEL: N70, O18, C67

【KeyWords】

Domestic Demand, External Demand, Dagum Gini Coefficient, Kernel Density Estimation, Coupling Coordination Degree