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?
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:
- Oil is found
- Oil (manufacturing) sector booms
- 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)
- Exports from other sectors become more expensive (due to currency value increase)
- Other sectors become less competitive.