Marine products account for the majority of Iceland’s exports of goods. Other important exports include aluminum, ferro-silicon alloys, equipment and electronic machinery for fishing and fish processing and pharmaceuticals. Information technology and life sciences and related services are important growth areas. The vast majority of Iceland’s exports go to the European Union (EU) and European Free Trade Association (EFTA) countries, followed by the United States and Japan. The U.S. is by far the largest foreign investor in Iceland, and the country’s largest supplier of imported services (e.g., financial and franchise services, movies/TV programs/music, tourism). Iceland’s relatively liberal trading policy was strengthened by accession to the European Economic Area in 1994 and by the Uruguay Round agreement, which also brought significantly improved market access for Iceland’s exports, particularly seafood products. However, the agricultural sector remains heavily subsidized and protected.

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, Iceland’s 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, with slightly higher growth forecast for 2004. While inflation is in check (around 2.5%), the unemployment rate of about 3.5% is high by Icelandic standards.

Iceland has few proven mineral resources, although deposits of diatomite (skeletal algae) are mined. Abundant hydroelectric and geothermal power sources allow over 90% of the population to enjoy 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, including aluminum and ferro-silicon smelting plants. Nordural Aluminum is a wholly owned investment by Century Aluminum of California. The plant employs more than 150 people and will double its 90,000 tons per year capacity before the end of the decade. Construction of a hydroelectric power plant in connection with Alcoa’s planned 322,000 ton per year aluminum smelter has already begun. The smelter will be opened for 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 European Free Trade Association member in 1970 and entered into a free trade agreement with the European Community in 1973. Under the agreement on a European Economic Area, 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