Economics • Indian EconomyHard
What structural economic phenomenon does the term 'Dutch Disease' describe in developing nations experiencing resource booms?
A. The appreciation of the domestic currency due to massive natural resource exports, which subsequently harms domestic manufacturing and agricultural competitiveness✓ Correct Answer
B. The sudden depletion of foreign exchange reserves caused by excessive short-term portfolio capital outflows during global recessions
C. The hyperinflationary spiral triggered by deficit monetization and unsterilized foreign exchange interventions by central banks
D. The severe unemployment surge resulting from premature automation in labor-intensive textile and leather sectors
💡 Solution & Explanation
Dutch disease refers to the negative consequence where a massive boom in natural resource exports causes the domestic currency to appreciate, making other domestic export sectors like manufacturing uncompetitive internationally. Distractors misattribute this to portfolio capital outflows, deficit monetization, or automation unemployment. Originally coined during the discovery of North Sea natural gas by the Netherlands, this concept highlights the challenges of resource-dependent economies. Developing nations utilize sovereign wealth funds to sterilize windfall gains and mitigate exchange rate shocks.
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