Economy of Iceland

Topics: Gross domestic product, Economics, Unemployment Pages: 8 (2395 words) Published: October 19, 2008

Iceland is located between Norway, Scotland and Greenland in the North Atlantic Ocean. It is also the 2nd largest island of Europe. Iceland's economy is based on the Scandinavian type capitalistic system, also known as the Nordic Tiger because of its rapid growth. With a population of only 312,872 people, it is ranked as a country with highest HDI and one of the highest GDP per capita PPP.

Iceland is a modern welfare state which provides health, education and security to all its citizens. Therefore, spending on health, education, social security and welfare amounted to one fourth of the GDP. Almost 40% of the GDP is the total tax burden in Iceland. All of these factors make Iceland the fifth-richest nation according to IMF, and the first according to the Human Development Index.

Iceland registered a healthy growth rate of 3% in 2003-2005 while in 2005 the economy boomed with 5.8%. In 2006, the growth rate was 4.2% while it declined to 4% in 2007. It is expected to decline further in 2008. The population of Iceland is 312,872 which grew at 2.6% annually. It has a workforce of 176,300 people. Inflation in the 1990's averaged about 4% while it rose in 2002 to 8.7%. The regulators were able to control it to 3.95% in 2005 and it stood at 4% in 2007.Gross National Income (GNI) per capita measured in terms of Purchasing Power Parity amounted to 36 thousand USD which is the eighth highest in the world and sixth highest among the OECD countries. While GDP per capita income in 2007 was US$ 39400. Agriculture Sector contributes 5.3% to the GDP while manufacturing sector contributes 26.3% growing at 9% and services sector 68.4%.

Exports have been heavily dependent on fishing industry but its importance has declined. Fishing industry employs 6% of the labors force while contributes 51% to the total merchandise exports (unlike 90% in early 1960's). Large extensive investment in the Aluminum and power sector in 2003 has been recorded that are equivalent to more than 1/3 of the 2003 GDP. Unemployment rate declined from 3.5% in 2003 to 1.9% in the 2007. Growth in manufactured goods (mainly aluminum smelting, medical and pharmaceutical products) has been recorded which now accounts for 38% of merchandise export in 2006. Current account deficit was 91 in Q4/2007 compared with 29 in Q2/2007.

Several years of rapid expansion has created both external and internal imbalances for the Icelandic economy.


Over the last decade, there has been a high average GDP growth rate of 7%. This was due to an extended period of structural reforms, privatization, fiscal consolidation and huge investments in the manufacturing sector. Large investment has been poured in the aluminum sector. Since the 2002 recession which had a growth rate of -0.3%, the economy grew at 2.7 percent in 2003 mainly due to the investment in the aluminum sector. This was followed by a 7.7% growth in 2004 and as more and more investment was poured in; the economy grew more and reached 7.5% in 2005. While this rapid growth and huge investment for such a sensitive economy created troubles like inflation and the economy’s growth rate dropped to 3.7%. The recovery period started and the economy is now growing at 4.2% in 2007. The Icelandic economy generated GDP of $8.8billion in 2002 and $10.8 billion in 2003. Huge inflow of investments in Iceland in the aluminum sector helped to create a GDP of $15.4 billion in 2006 which grew to $18.8 billion in 2007.The projects are near completion which would not only create employment but would also increase the total production capacity of aluminum smelter from 270 tones per year in 2005 to 800 tones per year in 2009.

Iceland also has the eighth highest Gross National income per capita Purchasing power parity of USD 36,000 in 2006 to USD 50,580 in 2007. Economic activity in Iceland is growing since 2003 due to the huge investment which caused all economic indicators to show a favorable...
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