Analysing the Effects of Changes in Wages and Exchange Rates with MODAG A

Abstract

This chapter describes analyzing of the effects of changes in wages and exchange rates with MODAG A. The Norwegian economy can be characterized as small and open as compared to other Nordic countries. Although the model MODAG A is not capable of giving exact results, this macroeconomic model can be considered as a tool for studying the effects of changes in wage and exchange rates. Even though it is technically easy to analyze the impacts of change in wage rates using a model like MODAG A, where wage rates are exogenous, the practical relevance of treating wage rates as exogenous variables can be discussed, as wage rates are endogenous in the real world. From economic theory, it can be concluded that wage formation is a rather complicated process where the position of power of the different parties in the labor market may influence the result. In this model, wage rates in the long run are assumed to depend on the change in product prices and productivity in industries exposed to foreign competition, while wage rates in the sheltered industries are assumed to follow the development in the exposed industries.