APPENDIX I Estimates of Mainland Output Gap and NAIRU 1/
APPENDIX II The General Government Structural Balance 1988-95 1/
APPENDIX III The Norwegian Petroleum Sector 1/
APPENDIX IV The Petroleum Boom and Norway’s External Competitiveness 1/
In this annex, we examine the extent to which an oil boom affects competitiveness in the rest of the tradable goods sectors. Consider a small open economy that produces three goods: oil (0), traditional tradables (T) and non-tradables (N). Assume that the oil sector is owned by the government, as is largely the case in Norway, and that the exchange rate is fixed and equal to one.
The excess demand for non-tradables is assumed to depend on prices and income. In equilibrium this excess demand will be equal to zero, i.e
Where r the relative price of tradables to non-tradable goods is defined as the real exchange rate, and y is the real income expressed in terms of non-tradable goods and given by
where HN and HT are supplies of the non-tradables and tradables respectively, and R = q 0 is the oil revenue in terms of non-tradables. The excess demand for money in nominal terms (E) is given by
where M is the nominal supply of money and L is the demand for money in nominal terms. Assuming that the demand for money equation L (in nominal terms) depends on the usual arguments (real income and price), we can write E as
By virtue of the homogeneity of degree zero property of the excess demand function, this can be rewritten as
We further assume that E is equal to zero only in the long-------- In particular, an increase of M will result in a short-run excess supply of money, which will be slowly eliminated through the balance of payments. It is further assumed that, due to Walras’s law, an excess supply of money will be reflected in as excess demand for non-tradables and an excess demand for traditional tradables. Then equation (1) has to be modified to incorporate the assumption that in the short-run, an excess supply of money is partially translated into an excess demand for non-tradables.
The model is completed by specifying the balance of trade defined as
Our interest is to discover the effect of an increase in oil revenues (R) on the degree of competitiveness of the tradable sector, defined here as the relative price of traditional tradables with respect to non-tradables. Total differentiation of equation (1) upon substitution yields:
This result indicates that an increase in oil revenues leads to a real appreciation or a deterioration of external competitiveness through two channels, an income effect (δN/δy) and a monetary effect (δN/δE δE/δy).