<p>How well do you know what you mean with "currency increases"?</p>

<p>The term Dutch disease describes an event where a single sector's boom (your example, finding oil) causes the said sector to grow and other sectors to decline as revenues increase in one sector. The booming sector causes the value of the currency (for example, the Dutch guilder) to appreciate (grow in value) compared to other currencies. This makes exports from non-booming sectors more expensive for other countries and therefore the booming of one sector causes a negative competitive effect on the other sectors.</p>

<p>So the effect is:</p>

<ol>
<li>Oil is found</li>
<li>Oil (manufacturing) sector booms</li>
<li>Currency value of the Dutch guilder increases as demand for Dutch guilder increases (to pay for Dutch oil. Can cause/be due to an inflow of foreign currencies)</li>
<li>Exports from other sectors become more expensive (due to currency value increase)</li>
<li>Other sectors become less competitive.</li>
</ol>

CC BY-SA 3.0
2015-11-26T12:36:34.007Z
Through the review panel I see that the OP sought to edit his question with this comment:
"Why is step 3 true in your answer?"
Giskard
CC BY-SA 3.0
2015-11-26T16:37:11.643Z
Step 3 is true because when supply increases (found new oil), the price of Dutch oil decreases. At the new, lower price Dutch oil is more competitive than other oil, so demand for Dutch oil increases. However, in order to purchase Dutch oil, you must first purchase Dutch guilders (because that is their currency). This causes an increase in demand for the Dutch guilder, so the "price" increases (aka the currency appreciates).
DornerA
CC BY-SA 3.0
2015-11-26T17:32:52.087Z
@DornerA the Dutch did use the guilder as their currency until 1999. Since then, it's been the Euro.
410 gone
CC BY-SA 3.0
2015-11-26T17:35:47.463Z
@EnergyNumbers, I was just using what was used in the example for the sake of consistency
DornerA
CC BY-SA 3.0
2015-11-26T19:10:59.603Z
@DornerA Your explanation of Step 3 is problematic or incomplete. 1) "Price of Dutch oil decreases" — but oil is a global commodity. The price of _all_ oil would decrease, right? 2) "Dutch oil is more competitive than other oil" — but Dutch disease can also happen in Canada, where Tar Sands oil is less desirable than light crude. 3) "Must purchase Dutch guilders" — but oil is typically traded in US Dollars.
200_success
CC BY-SA 3.0
2015-11-26T19:58:27.813Z
@200_success if a Dutch company pumps oil there, even if the initial trade is in dollars, then this influx of dollars anyway gets traded for guilders (to pay local workers, buy local hardware and services, and the luxury spending of local shareholders). If the amount of this trade is large compared to the rest of economy, this will significantly increase the demand for guilders and cause guilders to appreciate. It doesn't matter *who* trades the dollars for guilders - the buyer of oil, the producing company or even workers that get paid in dollars; in the end many dollars will buy guilders.
Peteris
CC BY-SA 3.0
2015-11-26T11:51:34.040Z
2015-11-26T12:48:31.367Z
2015-11-26T12:48:31.367Z
John L.
<p>I was just reading about the Dutch Disease and it causes that the value of a country's currency increases when said country suddenly finds natural sources of oil. Why is that? </p>

CC BY-SA 3.0
2015-11-26T21:44:35.020Z
Why is it that someone who wins money in a lottery often worse off in a few years after they win? Economics is about people and human behavior and how other people treat others.
Giacomo1968
<currency><dutch-disease>
Why does the Dutch disease cause the value of the currency to increase?
user6507
# Why does the Dutch disease cause the value of the currency to increase?

(Asked by: username_0 on 2015-11-26)

I was just reading about the Dutch Disease and it causes that the value of a country's currency increases when said country suddenly finds natural sources of oil. Why is that?

**Tags:** currency, dutch-disease

> **Comments:**
> **username_1**: Why is it that someone who wins money in a lottery often worse off in a few years after they win? Economics is about people and human behavior and how other people treat others.  

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## 1 answers

### Answer by username_2 on 2015-11-26. Score: 9

How well do you know what you mean with "currency increases"?

The term Dutch disease describes an event where a single sector's boom (your example, finding oil) causes the said sector to grow and other sectors to decline as revenues increase in one sector. The booming sector causes the value of the currency (for example, the Dutch guilder) to appreciate (grow in value) compared to other currencies. This makes exports from non-booming sectors more expensive for other countries and therefore the booming of one sector causes a negative competitive effect on the other sectors.

So the effect is:

1. Oil is found
2. Oil (manufacturing) sector booms
3. Currency value of the Dutch guilder increases as demand for Dutch guilder increases (to pay for Dutch oil. Can cause/be due to an inflow of foreign currencies)
4. Exports from other sectors become more expensive (due to currency value increase)
5. Other sectors become less competitive.

> **Comments:**
> **username_3**: Through the review panel I see that the OP sought to edit his question with this comment: "Why is step 3 true in your answer?"  
> **username_4**: Step 3 is true because when supply increases (found new oil), the price of Dutch oil decreases. At the new, lower price Dutch oil is more competitive than other oil, so demand for Dutch oil increases. However, in order to purchase Dutch oil, you must first purchase Dutch guilders (because that is their currency). This causes an increase in demand for the Dutch guilder, so the "price" increases (aka the currency appreciates).  
> **username_5**: @username_4 the Dutch did use the guilder as their currency until 1999. Since then, it's been the Euro.  
> **username_4**: @EnergyNumbers, I was just using what was used in the example for the sake of consistency  
> **username_6**: @username_4 Your explanation of Step 3 is problematic or incomplete. 1) "Price of Dutch oil decreases" — but oil is a global commodity. The price of _all_ oil would decrease, right? 2) "Dutch oil is more competitive than other oil" — but Dutch disease can also happen in Canada, where Tar Sands oil is less desirable than light crude. 3) "Must purchase Dutch guilders" — but oil is typically traded in US Dollars.  
> **username_7**: @username_6 if a Dutch company pumps oil there, even if the initial trade is in dollars, then this influx of dollars anyway gets traded for guilders (to pay local workers, buy local hardware and services, and the luxury spending of local shareholders). If the amount of this trade is large compared to the rest of economy, this will significantly increase the demand for guilders and cause guilders to appreciate. It doesn't matter *who* trades the dollars for guilders - the buyer of oil, the producing company or even workers that get paid in dollars; in the end many dollars will buy guilders.  

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