In recent decades, Iceland's economy has been prone to inflation due to periods of rapid growth and its dependence on just a few key export sectors (i.e., fish, and increasingly tourism), which can fluctuate significantly from one year to the next. The 1970s oil shocks hit Iceland hard. Inflation rose to 43% in 1974 and 59% in 1980, falling to 15% in 1987 but rising to 30% in 1988. Since 1990, due to economic reforms and deregulation, inflation has dramatically fallen, averaging around 4% in the 1990s. Due to several years of strong economic growth, Iceland experienced the most positive economic period in its history during that decade. However, as with many advanced countries, Icelandís economy experienced a mild recession during 2002 due to global conditions. That recession was short-lived, and healthy growth of 3% was registered during 2003. In 2004, the economy boomed, growing 5.8%, and inflation was close to the Central bankís upper limit (4%) at 3.95%, while unemployment decreased to about 3.2%.

Iceland has few proven mineral resources. Abundant hydroelectric and geothermal power sources allow over 90% of the population to enjoy electricity and heating from these natural resources. The Burfell hydroelectric project is the largest single station, with capacity of 270 megawatts (mw). The other major hydroelectric stations are at Hrauneyjarfoss (210 mw), Sigalda (150 mw) and Blanda (150 mw). Iceland is exploring the feasibility of exporting hydroelectric energy via submarine cable to mainland Europe and also actively seeks to expand its power-intensive industries, particularly aluminum smelting plants. Iceland-based Nordural Aluminum is a wholly owned investment by Century Aluminum of Monterey, California. The plant employs more than 200 people and will more than double its 90,000 tons per year capacity before the end of the decade. Construction of a hydroelectric power plant in connection with Alcoaís planned 322,000 ton per year aluminum smelter has already begun. The smelter will begin production in 2007 at which point over $2 billion will have been invested in this, the largest economic project in Icelandic history.

Iceland has no railroads. Organized road building began about 1900 and has greatly expanded in the past decade. The current national road system connecting most of the population centers is largely in the coastal areas and consists of about 13,000 kilometers (8,125 mi.) of roads with about 4,330 kilometers (2,706 mi.) paved. Regular air and sea service connects Reykjavik with the other main population centers. The national airline, Icelandair, flies from Iceland to Europe and North America, and is one of the country's largest employers. Iceland became a full member of the European Free Trade Association (EFTA) in 1970 and entered into a free trade agreement with the European Community in 1973. Under the European Economic Area (EEA) agreement, which took effect January 1, 1994, there is basically free cross-border movement of capital, labor, goods, and services between Iceland, Norway, and the EU countries.