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  • Price Level of Non-tradable Goods in Iceland: Explanations by Economic Fundamentals
  • Meistara
  • Most non-tradable goods are much more expensive in Iceland than in China.
    During the last decade there had been an observable appreciation of non-tradable
    goods in Iceland against those in China. Both the magnitude of the price gap and the
    length and monotonicity of the gap enlargement are questionable whether
    fundamentals can sustain them. In attempt to answer the question the paper will
    introduce economic theories that look at the phenomena from the angle of economic
    fundamentals and present data to define the situation and examine relevance of the
    It’ll be concluded that productivity difference in tradable sectors was not the
    cause for enlarging non-tradable price gap. However economic fundamental such as
    factor endowment can explain to some extent higher non-tradable price in Iceland.
    Various facts indicate that a boom started around 1997 and 1998 characterized by
    financial sector expansion had led to economic overheating which contributed to
    pushing up non-tradable price against tradable goods. This, in turn, caused nontradable
    goods in Iceland to appreciate against those in countries that were not
    experiencing a comparable overheating. This is a classic demonstration of
    unsustainable ‘Dutch disease’. Meanwhile increasing trade deficit helped to magnify
    the effect of the ‘Dutch disease’.

  • 11.5.2009

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