International trade and urban-rural income inequality in China

Abstract

ABSTRACT The issue of income inequality has persisted for decades in China, rendering it one of the world’s most unequal countries. Given the increasing significance of international trade in China, it is important to understand whether it widens urban-rural income inequality. This paper aims to investigate the causality between international trade and the urban-rural income gap in China through the Granger causality test. We found that variables including foreign direct investment, dependence on exports, and GDP can cause urban-rural income inequality, while urban-rural income inequality causes rural income growth. Our results contribute to the controversial literature on income inequality with a focus on the urban-rural difference.