External Demand Shock, Economic Rebalancing, and Unified National Market: Study Based on the Dynamic Quantitative Spatial Equilibrium Model

Abstract

Building a unified national market serves as a fundamental support and intrinsic requirement for creating a new development pattern and pursuing high-quality economic development. This paper examines the impact of external demand shocks and domestic market segmentation on China’ s economic growth and economic structure. It further discusses the potential role of establishing a unified national market in promoting the high-quality development of China’ s economy. Based on the dynamic quantitative spatial general equilibrium model, this paper characterizes the relationships among external demand shocks, market segmentation, economic growth, and economic structure within a unified theoretical framework. It accounts for major macroeconomic phenomena observed in China before and after the 2008 global financial crisis, such as the initial rise and subsequent decline in the economic growth rate and the transition from imbalance to balance in industrial structure, income distribution structure, and consumption-saving structure. The study finds that domestic market segmentation exacerbates the negative effects of shrinking external demand on economic growth and economic structure, while a unified national market can reduce the extent of decline in the economic growth rate by two-thirds. This paper further estimates the potential impacts of reducing segmentation in product and labor markets on economic growth and social welfare, and finds that product market integration has a more significant effect on promoting economic growth, while labor market integration is more beneficial for improving social welfare. Both help to facilitate high-quality economic rebalancing. The policy implication of this paper lies in that developing a unified national market has a great potential to drive economic growth and economic rebalancing. Reform is needed to unleash institutional dividends, enabling regions to shift from “segmentation” to “regional division of labor,” and facilitating high-quality economic development.

Keywords

unified national market / shrinking external demand / economic rebalancing / dynamic quantitative spatial equilibrium

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