time, there has been a considerable decrease in prices for our imports, such as clothing, footwear and electronic equipment. from 2003 to 2008, this improvement in norway ’ s terms of trade alone boosted national income by more than 20 per cent, or a good 4 per cent per year. the picture of norway ’ s favourable situation has been reinforced by the very severe impact of the financial crisis on other western economies, while norway seems to have emerged with nothing more than a mild downturn. nevertheless, there are many challenges ahead. chart 1 relative labour costs deviation from the average for the period 1970 – 2009 per cent, 1990 – 20101 figures for 2010 are an average for the period 1 january – 19 august 2010. a rising curve indicates weaker competitiveness. sources : statistics norway, technical reporting committee on income settlements ( tbu ), oecd, ministry of finance and norges bank. norwegian labour has never been as costly as it is now. norwegian businesses may lose out in the competition for contracts given the current high level of spare capacity in other countries. there are frequent reports of businesses relocating activities to neighbouring countries, such as sweden. labour in sweden is perhaps as much as 30 per cent cheaper than in norway and the two countries are closely connected in terms of language and culture. the management of norway ’ s oil wealth poses another challenge. history has shown that countries that suddenly gain access to an abundance of resources have a tendency to deplete the values rapidly and then fall into decline. 9 since the introduction of the fiscal rule in 2001, oil revenue spending in norway has been increased by close to nok 110 billion. oil revenues now fund about 1 / 6 of government expenditure. without a fiscal rule, spending the paradox of plenty. oil booms and petro - states by terry lynn karl ( 1997 ) provides a good description of the problems facing oil - exporting countries. would probably have been higher. in the 1950s, 60s and 70s, the tax burden was steadily increased to finance higher government expenditure. the return on our oil wealth has now taken over as the source of funding for increased public consumption. chart 2 oil revenue spending1 in billions of nok, 2002 – 2010 structural non - oil deficit. source : ministry of finance. but looking ahead, funding norway ’ s welfare system will be demanding. increases in oil revenue spending cannot be sustained for much longer. oil production will decline. at the same time, we have been through a period in which the need for

improve competitiveness, wages in these countries must fall or at least rise much more slowly than in other european countries. this only occurs when unemployment is high. with a flexible exchange rate, competitiveness can also improve when the domestic currency falls in value. a flexible exchange rate can thereby reduce fluctuations in employment and output. on the other hand, the foreign exchange market can be mistaken, driving the exchange rate away from the path indicated by fundamental conditions. herd behaviour and market psychology can contribute to fluctuations and instability. in spring 2001, the norwegian government and parliament defined a formal inflation target for monetary policy. the task of achieving the target was delegated to norges bank. norges bank sets the interest rate on banks ’ deposits and loans from the central bank. this interest rate determines banks ’ lending and deposit rates and the level of interest rates in general, as well as the price of the loans you take out as students. the interest rate is set with the objective of ensuring low and stable inflation. the operational target of monetary policy shall be annual consumer price inflation of close to 2. 5 per cent over time. low and stable inflation is now the guiding principle behind interest rate setting in most western countries. new zealand was the first country to introduce an inflation target at the end of the 1980s. many other countries have since followed suit. but even though inflation targeting is a relatively new phenomenon, the idea is not new. as early as the beginning of the 1900s, the swedish economist knut wicksell proposed that the interest rate should be used to keep the value of money – the price level – stable. 8 finn e. kydland and edward c. prescott ( 1977 ) : “ rules rather than discretion : the inconsistency of optimal plans ”, journal of political economy, 85, nr. 3, pp. 473 – 491. knut wicksell ( 1907 ) : “ the influence of the rate of interest on prices ”, economic journal, xvii, pp. 213 – 220. the shift in the norwegian economy, combined with a generous dose of good luck, has resulted in two “ golden decades ”. the major structural reforms have led to more efficient use of labour and other resources. developments in the norwegian economy have been fairly stable. unemployment has been low. we have also had luck on our side over the past decade. prices for norwegian export goods, such as oil and gas, metals, minerals, fish and freight, rose sharply. at the same