Abstract: Establishing the dominant position of domestic circulation is the core essence of the new development paradigm. The potential of digital economy as a new engine for economic development to enhance both the scale and quality of domestic circulation is closely related to the coordination and effectiveness of China’s major economic development strategies. This paper divides the value of domestic production into four parts from the perspectives of demand sources and factor supply. It proposes two approaches, broad and narrow, for measuring domestic circulation, based on different interpretations of the foreign value-added generated by domestic demand. By constructing a non-competitive digital economic input-output model for the period 2007 to 2020 and employing Structural Decomposition Analysis (SDA) method, this study empirically investigates the impact of digital economy on the dual circulation pattern from both demand and supply sides. The research findings reveal that the development of digital economy significantly increases the proportion of domestic value-added triggered by domestic demand, thereby strengthening the dominant position of domestic circulation. This effect is achieved through the coordinated development in the intermediate input structure, the enhancement of digital-real economy integration, and the increasing share of digital economy consumption and investment in the final demand structure. China faces challenges in the digital product manufacturing sector, necessitating the overcoming of core technological bottlenecks to fully harness the role of digital economy in enhancing the quality of domestic circulation and achieving the localization of key industrial chains.

Key words: digital economy, dual circulation, input-output model, structural decomposition analysis