Dynamic Analysis on Domestic Demand Expansion and Labor Market Reform in China

To tide over the recent global economic slump, China has modified their growth policy. To bring up their domestic demand, Chinese government is enormously financing their domestic markets and expedites reforming their labor markets by alleviating the HUKOU system, which has restricted migration of labor forces. This paper analysis the effects of the recently altered policies about domestic demand expansion and labor market reform, using the Dynamic General Equilibrium Model. The analysis shows that the domestic demand expansion policy will lead increase in disposable income of households, GDP and interest rate, which attracts foreign directed investments; increase in demands will cause increase in price level, which ill-affects the terms of trade. As a matter of fact, the trade surplus of China will likely be diminished. Furthermore, according to the analysis, relaxing restrictions about migration of labor forces will help the domestic demand expansion policy to accelerate economic growth. Therefore, the Republic of Korea should establish careful exportation strategies which aim the rapidly growing Chinese domestic demand markets.