The contrast-enhanced magnetic resonance imaging (MRI) signal is rarely a direct measure of contrast concentration; rather it depends on the effect that the contrast agent has on the tissue water magnetization. To correctly interpret such studies, an understanding of the effects of water movement on the magnetic resonance (MR) signal is critical. In this review, we discuss how water diffusion within biological compartments and water exchange between these compartments affect MR signal enhancement and therefore our ability to extract physiologic information. The two primary ways by which contrast agents affect water magnetization are discussed: (1) direct relaxivity and (2) indirect susceptibility effects. For relaxivity agents, for which T1 effects usually dominate, the theory of relaxation enhancement is presented, along with a review of the relevant physiologic time constants for water movement affecting this relaxation enhancement. Experimental issues that impact accurate measurement of the relaxation enhancement are discussed. Finally, the impact of these effects on extracting physiologic information is presented. Susceptibility effects depend on the size and shape of the contrast agent, the size and shape of the compartment in which it resides, as well as the characteristics of the water movement through the resulting magnetic field inhomogeneity. Therefore, modeling of this effect is complex and is the subject of active study. However, since susceptibility effects can be much stronger than relaxivity effects in certain situations, they may be useful even without full quantitation.