Dutch Disease has been broadly understood as the inability to manage too much wealth, like a rich man falling ill due to the availability of too much money for consumption. For a nation, the sudden discovery of exportable wealth itself will be counterproductive for export efforts of other products. This is because of the strengthening of home currency and diversion of resources to manufacture non-tradables. There are many reasons for `Dutch Disease', like the subsequent change of composition of capital flow.

The concept of Dutch Disease is quite well known in the study of exchange rates. In 1960s, discovery of vast tract of natural energy sources viz., natural gas in its north sea, increased the wealth of Netherlands substantially. The large volume exports of the high priced energy products lead to strengthening of the currency in the global foreign exchange market and made its export of non-oil commodities uncompetitive. Country's overall exports ultimately fall down. A general reduction in the exports on account of new found wealth is being referred as `Dutch Disease' after observing this specific event, particularly after being used as a title for an article by The Economist in 1977.

Subsequently the concept was extended to the adverse effect on exports due to increase in foreign aid. Where aid triggers higher consumption, either by encouraging imports of the consumption requirements or discouraging exports to meet the higher level of domestic consumption. This phenomenon is called `absorption of aid'. It takes place when the current account deficit (calculated without including aid) increases due to foreign aid. On the other hand, a country can defer the usage of foreign aid and the consequential benefits. It can instead preserve the foreign aid for the time being thereby increasing its foreign exchange reserves. Such situation is called "saving the foreign aid". The increase in forex reserves could be temporary while "saving".

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