inflation through 2006, despite appreciably stronger output and employment growth, may indicate that developments have been influenced by conditions on the production and supply side of the economy. the present economic expansion differs from previous upturns in that inflation has remained low so far despite strong growth and increasing capacity utilisation. there are probably several reasons for this. first, low import prices and high prices for our commodity exports have improved norway ’ s terms of trade considerably. prices for oil and gas, shipping, fish, industrial commodities and engineering products have increased considerably. moreover, norwegian importers have gained access to new markets in central europe and asia which offer considerably cheaper consumer goods. the terms of trade have improved by about 40 per cent since 2002. a similar situation has not been seen since world war i when earnings in the shipping industry and other export industries were exceptionally high for a period. second, an ample supply of labour has boosted output growth. a strong increase in the population has expanded the growth capacity of the norwegian economy without a comparable increase in wages. in particular, the supply of foreign labour has increased sharply after eu enlargement in 2004. over the past two years, these labour inflows have accounted for over 30 per cent of growth in the labour force in norway. at the same time, this has enabled norwegian companies to be bolder in accepting new assignments and investing knowing that they can procure labour throughout europe. in addition to increased labour inflows from poland, lithuania and other central european countries, we have long benefited from inflows of labour from sweden. many workers are on temporary assignment and their consumption is primarily concentrated in their home country. the norwegian economy has seen a net capacity increase. third, the norwegian business sector has been quick to integrate new technology. this applies both to companies competing on international markets and those supplying goods and services to the domestic market. in comparison with other countries, it is particularly productivity gains in banks and other service sectors that stand out. examples are automated processes and swifter payments in the financial industry and improved inventory and management systems in commerce and transport. this results in lower production costs. solid productivity growth and high prices for export goods, and goods and services supplied to the petroleum sector have contributed to a fall in the wage share of norwegian enterprises in recent years, despite a low rise in prices for consumer goods and services in norway. wage shares have also fallen in many other countries. the global supply of labour has increased as result of the integration

national accounts, which include figures back to 1978. despite cyclical fluctuations, growth has been very high for the past 15 years. so far in the cyclical upturn, the mainland economy has grown by an average of just over 4 per cent annually. utilisation of production capacity, labour and real capital has increased markedly since summer 2003, and capacity utilisation is now very high in most industries. there are reports of limited capacity in most industries and regions and labour shortages in almost every occupational category. in some municipalities, the number of vacancies is higher than the number of job - seekers. there are also reports of shortages of other factor inputs. there are shortages of drivers, pre - school teachers, supervisors, engineers, carpenters, architects, auditors, accountants, it personnel and health workers. it has probably not been since the 1970s that we find such widespread reports of purely physical production constraints, for example now in the form of shortages of rigs and other equipment in the petroleum industry or shortages of plank, concrete, insulation and scaffolding in the construction industry. new national accounts figures show that activity in the norwegian economy increased at a faster - thanprojected pace in the period 2004 – 2006. the figures also indicate that productivity growth has been higher than expected. we interpret this to mean that the permanent level of production capacity has also increased. an alternative interpretation is that favourable cyclical developments are fuelling productivity growth. if that is the case, it may show a marked decline when economic growth slows. unemployment has fallen sharply in the past few quarters. the rate of decline and level of unemployment are reminiscent of two previous cyclical peaks, the one in the mid - 1980s and the other that started in the late - 1990s and continued into this decade. both expansions culminated in a sharp rise in wage and cost inflation. employment growth was for a long period lower than in the cyclical upturns in the 1980s and 1990s. in the early phases of the upturn, output growth primarily reflected a strong increase in the number of person - hours worked partly owing to the marked increase in average working hours when sickness absence fell in 2004. a high level of inward labour migration after eu enlargement in 2004 also contributed to increasing economic capacity. historically, there has been a close relationship between the change in prices for domestically produced goods and services and the level of capacity utilisation, here measured by the output gap. this relationship broke down in 2006. surprisingly low