Iceland has a highly developed mixed market economy. In 2011, the gross domestic product (GDP) was US$12 billion. By 2018, it had increased to a nominal GDP of US$27 billion, and by 2025, it reached US$35 billion. As of 2025, it has the fifth highest nominal GDP per capita ($91,000) and fourteenth highest GDP per capita by PPP ($81,000).Source: Statistics Iceland. In 2025 Iceland topped the Human Development Index.
The nation has high levels of free trade and government intervention. However, government consumption is lower compared to other Nordic countries. 100% of Iceland's electrical grid is produced from renewable sources. Geothermal and Hydropower are the primary sources of energy in Iceland. A founding member of the OECD, Iceland has the third lowest Not in Education, Employment, or Training (NEET) rate among the youth.
The 2008–2011 Icelandic financial crisis produced a decline in GDP and employment, which has since been reversed entirely by a recovery aided by a tourism boom starting in 2010. Tourism accounted for more than 10% of Iceland's GDP in 2017. After a period of robust growth, Iceland's economy slowed down according to an economic outlook for the years 2018–2020 published by Arion Research in April of 2018.
In the 1990s Iceland undertook extensive free market reforms, which initially produced strong economic growth. As a result, Iceland was rated as having one of the world's highest levels of economic freedomIceland: One of the world´s most free economies , Invest in Iceland Agency as well as civil freedoms. In 2007, Iceland topped the list of nations ranked by Human Development IndexHuman Development Index and was one of the most egalitarian, according to the calculation provided by the Gini coefficient.
From 2006 onwards, the economy faced problems of growing inflation and current account deficits. Partly in response, and partly as a result of earlier reforms, the financial system expanded rapidly before collapsing entirely in the 2008–2011 Icelandic financial crisis. Iceland had to obtain emergency funding from the International Monetary Fund and a range of European countries in November 2008. The economy has since rebounded since 2010,"Hagstofa Íslands. Helstu hagstærðir hins opinbera 1980–2014" (in Icelandic). Statistics Iceland. Retrieved 25 May 2015. and continues to grow to this day.
History In medieval Iceland, trade was traditionally conducted through barter.Mehler, Natascha; Gardiner, Mark (2021), Coinless exchange and foreign merchants in medieval Iceland (AD 900-1600), Hamburg: Wachhotz Verlag, pp. 35–54, , , , The traditional nationalistic historical narrative says that Iceland had experienced a golden age from 874 until the 11th century, when the country came under foreign rule and "suffered humiliation" as its economy declined.Bergmann, Eiríkur (1 March 2014). "Iceland: A postimperial sovereignty project". Cooperation and Conflict. 49 (1): 33–54. . . . There is very little evidence to support this narrative.Kjartansson, Helgi Skúli (18 November 2019). "Axel Kristinsson, Hnignun, hvaða hnignun? Goðsögnin um niðurlægingartímabilið í sögu Íslands [Decline, What Decline? The Myth of the Depressed Era in the History of Iceland]. (Reykjavík: Sögufélag 2018). 280 pp". 1700-tal. 16: 149–151–149–151. . .Kristinsson, Axel (2018). Hnignun, hvaða hnignun? Goðsögnin um niðurlægingartímabilið í sögu Íslands. (in Icelandic) Sögufélag.
Iceland had among the lowest GDP per capita out of all the Western European countries at the start of the 20th century.Jónsson, Guðmundur (1999). Hagvöxtur og iðnvæðing. Þjóðarframleiðsla á Íslandi 1870–1945. An assessment by economists at the Central Bank of Iceland stated that the country's "post-World War II economic growth has been both significantly higher and more volatile than in other OECD countries", and that "the Icelandic business cycle has been largely independent of the business cycle in other industrialised countries." Iceland has had a total of twenty financial crashes since 1875, according to Reuters.Jones, Maiya Keidan and Marc. "Red hot Iceland keeps some investors out in the cold". Reuters UK. Archived from the original on 28 June 2017. Retrieved 5 July 2017.
Fishing became a large part of the Icelandic economy after the 1880s, partly due to expanded fishing with sailing smacks.JÓnsson, SigfÚs (1 July 1983). "The Icelandic fisheries in the pre-mechanization Era, C. 1800–1905: Spatial and economic implications of growth". Scandinavian Economic History Review. 31 (2): 132–150. . . During the Second World War, the UK imposed trade sanctions on Iceland to prevent them from trading with Germany. After the British and later American occupations of the island, the economy was boosted by a substantial amount, and Iceland went from one of the poorest countries in Europe to one of the wealthiest.Steinsson, Sverrir (2018). "A Theory of Shelter: Iceland's American Period (1941–2006)". Scandinavian Journal of History. 43 (4): 539–563. . . This was furthered by Iceland being included as part of the post-WWII Marshall Plan, receiving the largest amount per capita between 1948 and 1951, almost double the amount of the next highest recipient.Guðmundur Jonsson, Sigurður Snævarr (2008). "Iceland's Response to European Economic Integration". Pathbreakers: Small European Countries Responding to Globalisation and Deglobalisation. Peter Lang. p. 385.
Towards the end of the 20th century, Iceland's economy continued to grow. A coalition between the Independence and Progressive parties led to the privatization of state-owned banks and telecommunications. Corporate income tax was reduced to 18%, inheritance tax was greatly reduced, and the net wealth tax was completely abolished. The term "Nordic Tiger" became heavily used refer to the period of economic prosperity in Iceland that began in the 1990s.Global freeze kills Nordic tiger Archived 5 November 2009 at the Wayback Machine, The Age, 11 October 2008.
The "Nordic Tiger" period came to a sudden end as a result of the 2008 financial crisis. Iceland went from being the 10th richest country in the world in 2007 to the 21st in 2010.Sigríður Benediktsdóttir, Gauti B. Eggertsson, Eggert Þórarinsson (November 2017). "The Rise, the Fall, and the Resurrection of Iceland". NBER Working Paper No. 24005. Banks made risky loans and manipulated markets, with the country's regulators understaffed and not properly supervising them. The Icelandic króna underwent sharp inflation, with the three largest banks in the country being placed under government control. Iceland's central bank raised its interest rate to 18% in an attempt to combat the inflation.Benediktsdottir, Sigridur; Danielsson, Jon; Zoega, Gylfi (1 April 2011). "Lessons from a collapse of a financial system". Economic Policy. 26 (66): 183–235. . . .Iceland's interest rate soars to 18% Archived 24 January 2009 at the Wayback Machine, ITN News, 8 October 2008.
With help from the International Monetary Fund (IMF), Iceland's economy stabilised and managed to pay off all of its loans by the end of 2015. Economists Ásgeir Jónsson and Hersir Sigurjónsson said that "Iceland was treated differently from developing countries and former IMF clients. There was no call for Iceland to adopt sharp austerity measures at the inception of the joint economic plan. Instead, the government would be allowed to maintain large public deficits in the first year – 2009 – allowing fiscal multipliers to counteract the output contraction that was underway. Iceland also was not asked to downsize its Scandinavian-type welfare system."Jónsson, Ásgeir; Sigurgeirsson, Hersir (2016). The Icelandic Financial Crisis - A Study into the World´s Smallest Currency Area and its Recovery from Total Banking Collapse. Palgrave. p. 146. .
Geography and resources Iceland occupies a land area of 103,000 square kilometers. It has a 4,790 kilometer coastline and a 200 nautical mile (370.4 km) exclusive economic zone extending over 758,000 square kilometers of water. Approximately only 0.7% of Iceland's surface area is arable, since the island's terrain is mostly mountainous and volcanic.
Iceland has few proven mineral resources. In the past, deposits of sulphur have been mined, and diatomite (skeletal algae) was extracted from Lake Mývatn until recently. However, today most sulphur is obtained in the desulfurization of petroleum and fossil gas. The diatomite plant has closed for environmental reasons. The only natural resource conversion in Iceland is the manufacture of cement. Concrete is widely used as building material, including for all types of residential housing.
By harnessing the abundant hydroelectric and geothermal power sources, Iceland's renewable energy industry provides close to 85% of all the nation's primary energy – proportionally more than any other countryPresentation to the International Partnership for the Hydrogen Economy , Icelandic Ministry of Industry and Commerce & Ministry for Foreign Affairs, published January 2005, accessed 2007-05-14 – with 99.9% of Iceland's electricity being generated from renewables.
By far the largest of the many Icelandic hydroelectric power stations is Kárahnjúkar Hydropower Plant (690 MW) in the area north of Vatnajökull. Other stations include Búrfell (270 MW), Hrauneyjarfoss (210 MW), Sigalda (150 MW), Blanda (150 MW), and more. Iceland has explored the feasibility of exporting hydroelectric energy via submarine cable to mainland Europe and also actively seeks to expand its power-intensive industries, including aluminium and ferro-silicon smelting plants."Power Plants". November 10, 2011.
Sectors In 2017 the proportion of Iceland's exports was: tourism 42%, seafood 17%, aluminium 16%, other 24%.
Tourism
Tourism is one of Iceland's largest export sectors. Tourism accounted for more than 12% of the country's GDP in 2017. Iceland is one of the most tourism-dependent countries on Earth. In October 2017 the tourism sector directly employed around 26,800 people, with the total number of employees in the country being 186,900.
At the start of the growth period around 2010, tourism benefited from a weak ISK, but a strong ISK then cooled down the sector.Slower growth in tourism - Statistics Iceland From 2010 to 2018, tourist arrivals in Iceland increased by 378%.
Manufacturing Iceland is the world's largest electricity producer per capita. The presence of abundant electrical power due to Iceland's geothermal and hydroelectric energy sources has led to the growth of the manufacturing sector. Power-intensive industries, which are the largest components of the manufacturing sector, produce mainly for export. Manufactured products constituted 36% of all merchandise exports, an increase from the 1997 figure of 22%. Power-intensive products' share of merchandise exports is 21%, compared to 12% in 1997.
Aluminium Aluminium smelting is the most important power-intensive industry in Iceland. There are currently three plants in operation with a total capacity of over 850,000 metric tons per year (t/yr) in 2019, putting Iceland at 11th place among aluminium-producing nations worldwide as of 2023."USGS Minerals Information: Mineral Commodity Summaries" (PDF). minerals.usgs.gov. Retrieved 2025-01-14
Rio Tinto Alcan operates Iceland's first aluminium smelter (plant name: ISAL), in Straumsvík, near the town of Hafnarfjörður. The plant has been in operation since 1969. Its initial capacity was 33,000 metric tons (t) per year, but it has since been expanded several times and now has a capacity of about 189,000 t/yr.Háskólabókasafn, Landsbókasafn Íslands -. "Timarit.is". timarit.is (in Icelandic). Retrieved 31 May 2024.