A Two-Sector Macroeconomic Model of the Chinese Economy in Transition

Observation shows that there exist two parallel sectors - the private and state sectors in the Chinese economy and a large amount of employees of State-Owned enterprises (SOEs) "waiting at home". A model embodying these characteristics of the transitional Chinese economy is developed for comparative static analysis. It finds that a reduction in wage difference between working and waiting employees will raise real variables and reduce price level, presuming labour resource in SOEs is efficiently exploited after laying off waiting workers and marginal product of labour is positive.