Dutch Disease

AAA

DEFINITION of 'Dutch Disease'

Negative consequences arising from large increases in a country's income. Dutch disease is primarily associated with a natural resource discovery, but it can result from any large increase in foreign currency, including foreign direct investment, foreign aid or a substantial increase in natural resource prices.

INVESTOPEDIA EXPLAINS 'Dutch Disease'

Dutch disease has two main effects:

1. A decrease in the price competitiveness, and thus the export, of the affected country's manufactured goods
2. An increase in imports

In the long run, both these factors can contribute to manufacturing jobs being moved to lower-cost countries. The end result is that non-resource industries are hurt by the increase in wealth generated by the resource-based industries.


The term "Dutch disease" originates from a crisis in the Netherlands in the 1960s that resulted from discoveries of vast natural gas deposits in the North Sea. The newfound wealth caused the Dutch guilder to rise, making exports of all non-oil products less competitive on the world market.

In the 1970s, the same economic condition occurred in Great Britain, when the price of oil quadrupled and it became economically viable to drill for North Sea Oil off the coast of Scotland. By the late 1970s, Britain had become a net exporter of oil; it had previously been a net importer. The pound soared in value, but the country fell into recession when British workers demanded higher wages and exports became uncompetitive.


RELATED TERMS
  1. Resource Curse

    A paradoxical situation in which countries with an abundance ...
  2. Floating Exchange Rate

    A country's exchange rate regime where its currency is set by ...
  3. Net Importer

    A country or territory whose value of imported goods is higher ...
  4. Net Exporter

    A country or territory whose value of exported goods is higher ...
  5. Export

    A function of international trade whereby goods produced in one ...
  6. Value Added

    The enhancement a company gives its product or service before ...
Related Articles
  1. Economics Basics
    Economics

    Economics Basics

  2. What Is The Balance Of Payments?
    Economics

    What Is The Balance Of Payments?

  3. What Is International Trade?
    Personal Finance

    What Is International Trade?

  4. Current Account Deficits: Government ...
    Budgeting

    Current Account Deficits: Government ...

comments powered by Disqus
Hot Definitions
  1. Certificate Of Deposit - CD

    A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified fixed interest rate ...
  2. Days Sales Of Inventory - DSI

    A financial measure of a company's performance that gives investors an idea of how long it takes a company to turn its inventory ...
  3. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  4. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  5. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  6. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
Trading Center