With floating exchange rates, the exchange rate may adapt to changes in growth prospects and changes in the terms of trade. Since the end of the 1990s the Swedish krona has depreciated against the Norwegian krone. During this period, Norway has experienced a considerable rise in prices for  2  Source: The Technical Reporting Committee on Income Settlements, Report no. 1, 2005, preliminary version. The estimates take account of both actual hourly wages and indirect costs. 3  Aftenposten, October 1982  2  BIS Review 15/2005  export products such as oil and aluminium, partly owing to high demand in China. Sweden, on the other hand, has been influenced by a slower rise in prices for goods such as ICT products. The close trade relations between Norway and Sweden are of benefit to both countries. Even if petroleum exports to Sweden rose sharply in the 1970s, Norway still ran a trade deficit with Sweden. We have needed goods from Sweden to build up our petroleum sector, and increased wealth has enabled us to increase goods imports from Sweden. Norway has thus maintained its import share of traditional goods from Sweden while our export share to Sweden has declined. Weaker business sector competitiveness in Norway in relation to that of Sweden is probably one important factor. Looking ahead, some of the features we have observed over the past 30 years may change. There is an imbalance between the cost level in Norway and in Sweden. The cost differential cannot be sustained in the longer term.
Hourly labour costs for a Swedish manufacturing worker were on average 8 per cent higher than for a Norwegian manufacturing worker in 1980 measured in common currency. In 2004, however, hourly labour costs for a Swedish manufacturing worker was almost 20 per cent lower2. Competitiveness in Norway’s manufacturing industry is now close to 20 per cent weaker than the average for the past 30 years. Norwegians had to pay close to 138 Norwegian kroner for 100 Swedish kronar in 1970. Today, we only have to pay a little more than 90 Norwegian kroner. The appreciation of the Norwegian krone has made it less expensive to buy goods and services in Sweden. During longer periods, the exchange rate seems to have been influenced by changes in prices for export goods and import goods in the two countries. In the 10 years to 1983, the Norwegian krone showed a particularly strong appreciation against the Swedish krona. This occurred at the same time as Norway experienced far more favourable developments in prices for its export goods relative to import goods than was the case for Sweden. Norway’s terms of trade improved. In the 1970s, the sharp rise in oil prices contributed to this. In practice, the appreciation of the Norwegian krone against the Swedish krona occurred when the Swedish authorities devalued their currency more than the Norwegian authorities. The authorities devalued against a basket of currencies. In Sweden, the Palme government’s devaluation of 16 per cent in October 1982 was particularly strong.