Trade and Business

Size and income level

The Icelandic economy is the smallest within the OECD, generating GDP of ?10.2 billion in 2004. This was less than 1/1000 of the US economy, 1/20 of the Danish economy and 1/3 of the economy of Luxembourg but ten times larger than the economy of Malta.

The small size of the Icelandic economy mainly reflects the small size of the population, which was only 294 thousand at the end of 2004. Iceland’s small population has not inhibited economic growth and prosperity. The country has all the characteristics of a modern welfare state. GNI per capita measured in terms of Purchasing Power Parities (PPP) amounted to 32.4 thousand USD in 2004, the ninth highest in the world and the sixth highest among the OECD countries. In comparison to the Nordic countries, Iceland’s GNI per capita is lower than in Norway, but higher than in Denmark, Finland and Sweden, and somewhat above the EU average.

This prosperity has largely been built on Iceland’s comparative advantages in abundant marine and land-based natural resources, as well as human capital. The location and geology of Iceland determine its main resources which are fish from some of the richest and cleanest waters in the world, and hydro and geothermal energy. Both these resources are essentially renewable and non-polluting and are self sustainable for the long term under scientific management. Iceland is the 12th largest fishing nation in the world, exporting nearly all its catch as domestic demand is relatively small. Even when the ongoing phase of investment in power-intensive industry is completed in 2008, only around 25% of economically harnessable hydro and geothermal power will have been harnessed. Iceland’s unspoiled natural environment represents a third major resource, reflected in a large and growing tourist industry. High labour force participation by women and the young and elderly – with 81% of the population aged 16 to 74 employed – as well as long working hours by international comparison, also contribute to Iceland’s robust growth.

Foreign trade

Icelandic trade has many of the characteristics of small resource-based open economies, such as a high degree of openness, a large share of primary products and commodities and a small share of intra-industry trade. Nevertheless, the diversity of exports has increased significantly in recent years. In 2004, imports and exports of goods and services amounted to 41% and 36% of GDP respectively.

The mainstay of merchandise exports is still fish and other marine products although, as a share of total export, this category has been declining over the past 12 years. In 2004, fish and other marine products accounted for 60% of merchandise exports and 39% of total exports, down from 82% and 60% respectively in 1991. Exports of manufactured products have been growing rapidly in importance, and accounted for 35% of merchandise exports in 2004. This is mainly the result of growth in aluminium smelting and in medical and pharmaceutical products. Export of services grew rapidly over the past decade, as the economy became more service-oriented. Services now account for 36% of total export revenues while in 1990 the share was 26%.

Iceland imports a wide range of manufactured goods and commodities, reflecting both the small size of the economy and the limited range of natural resources. Imports of capital goods accounted for 28% of total merchandise imports in 2004. Industrial supplies and consumer goods are around one-third of imports each.

Iceland is the westernmost outpost of Europe and therefore strategically located for business between Europe and North America, enhanced by membership of EFTA (the European Free Trade Association) since 1970 and the European Economic Area (EEA), which has integrated Iceland into the internal market of the EU since it went into effect on January 1, 1994. The EEA constitutes the world’s largest market, with GDP of ?9.6 trillion. EEA membership implies that business legislation has been adapted to that of the EU, guaranteeing the free flow of goods, services, capital and labour.

Free trade arrangements with Europe have stimulated Iceland’s trade with the region, causing the share of North America to fall. In 2004, four-fifths of merchandise exports went to the member countries of the EEA, which also were the source of almost three-quarters of imports. Currently, the largest trading partner countries are Germany, the UK, the Netherlands and the Nordic countries. In terms of currency, the euro area constitutes the largest trading area, accounting for 40% of imports and 48% of exports. Iceland has in recent years generally had a trade surplus with the UK, Germany, the Netherlands and the Iberian countries, but a deficit with the USA, Japan and its Nordic neighbours. Iceland’s ratio of services to total trade is one of the highest among OECD countries. In 2003, Iceland ranked third with a share of services to total trade of one-third. Data on the direction of services trade are not as reliable as merchandise trade data. However, just over 1/5 of Iceland’s services exports in 2004 used the euro and 2/5 used the USD as the vehicle currency.

_{Extractions from "The Economy of Iceland 2005"
Published by the Central Bank of Iceland.}