What is Dutch Disease as described in the material?

• A. A phenomenon where discovery of natural resources leads to a recession by losing competitiveness
• B. A policy of subsidizing dairy farming
• C. A sudden increase in manufacturing growth due to export demand
• D. A stable exchange rate regime

Answer: (A)

Dutch Disease occurs when a country discovers valuable natural resources and the resource boom pulls labor and capital into that sector. The result is an appreciating currency and higher incomes that make other tradable sectors—like manufacturing and agriculture—less competitive abroad. As the resource sector expands, investment and employment shift away from these other sectors, which can slow or even shrink their output and exports, sometimes causing a recession despite strong resource activity. This matches the idea that discovering natural resources can lead to a recession by losing competitiveness.

Subsidizing dairy farming isn’t about this macroeconomic shift; a sudden manufacturing growth due to export demand is the opposite and would not reflect the crowding-out effect; and a stable exchange rate regime is an institutional setup, not the dynamic described by Dutch Disease.