Wednesday, August 21, 2013

Back-of-the-Envelope on the Kroner

I did a bit of Googling last night and satisfied myself that the Norwegian kroner is indeed one of the most overvalued currencies in the world, perhaps to the tune of 80 percent--for ease of computation, assume 100 percent,  or a factor of two.  For the Norwegian Kroner, assume a price of five--lower than what Google says but rounded down for convenience and to take account of exchange rates.  Which is to say, if we got twice as many kroner for our dollar--say 10 instead of five. 

So: we just paid 180 kroner for an appealing but very modest lunch  At the going rate, that pencils out to about $26.  Divide by two and you get $13 which is more or less what you would expect at the Palookaville price..

Next question is, of course, what do these numbers mean for the ordinary Norwegian?   I suspect the answer is not very much    I'm having a tough time laying my hands on the data just now but I suspect the average Norwegian has more or less as easy a time buying Big Macs or Iphones as people in the US. 

So what has made the kroner so %^&$! expensive?  I want to say "oil"--money pouring in to finance the Norwegian oil boom  The objection to my suggestion is that Denmark and Sweden are pretty expensive too, and they don't have any oil.   In my favor I can say that Norway seems to be even more expensive than the other two.  This boils down to saying that they have exported the inflation you might expect from the oil boom to foreign investors (and tourists) in the form of higher exchange rates.

I really can't blame them for that but it does make me wonder--something of the same sort seems to have happened  to the Netherlands when they brought in their gusher.  The Netherlanders complain that the oil was a poisoned chalice in that the rising cost of Dutch investment sucked capital out of so many competing Dutch projects.  Yet I don't hear any similar complaint about Norway  Am I missing something?  Could it be that Norway just doesn't have that many competing projects to begin with?  Or--?

3 comments:

CrocodileChuck said...

Or............

Norway doesn't have that much tourism, so the disparity you noted isn't as evident.

Here in Australia we too have the 'Dutch Disease'.

And you'll find lunch with a drink in a capital city will set one back A$10-15. AAARGH!

bjdubbs said...

Stronger currency means more purchasing power, less inflation. You've got it upside down.

Larry, The Barefoot Bum said...

Well...

A stronger (or weaker) currency doesn't really directly entail anything about domestic inflation. Indeed, one primary purpose of revalueing a currency is to change the international terms of trade without changing domestic price levels. (And this is one reason why the Eurozone is having a lot of trouble; the member countries don't have their own national currencies to revalue, and, worse yet, their debts are nominally in euros.)

Norway has a strong currency relative to the US, then that means that Norway wants to import more from the US and export less to the US. IOW, they want to send more tourists to the US than they want US tourists to visit Norway.

Buce is being a little ethnocentric when he says, "So what has make the kroner so ... expensive?" He's shown evidence only that the kroner is expensive in US dollars, and speculates that the kroner is not expensive in Norwegian labor time. A quick Google reveals that Norway's inflation rate peaked at around 5.5% in 2009 and is around 3% right now.

Note that many scholars, myself included, believe that the "resource trap" is a consequence of the distributional nature of resource economics: they are much easier to monopolize, leading to very concentrated rent-seeking. In countries aware of the problems, governmental action can (but doesn't always) improve the distributional consequences.

The apt comparison, I think, is between Norway and Sweden (with their own currencies) on the one hand, and Finland (euro) on the other. My gut feeling is that because Norway & Sweden have their own sovereign currencies, their financial system is in better shape than the eurozone, which is slowly unraveling.