Economy
GDP (2006): $18.4 billion.
GDP growth rate (2005): 5.8%; (2006): 2.6%.
Per capita GDP (2006): $53,766.
Inflation rate (2007): 4%.
Budget (2007): $6 billion.
Annual budget surplus (2006): 1.4% of GDP.
Net public debt (2007): 17% of GDP.
Foreign aid as part of 2005 budget: 0.18% of GDP.
Natural resources: Marine products, hydroelectric and geothermal power.
Agriculture: Products--potatoes, tomatoes, cucumbers, turnips, livestock.
Industry: Types--aluminum smelting, fishing and fish processing technology, ferro-silicon alloy production, hydro and geothermal power, tourism, information technology.
Trade: Exports of goods (2006)--$3.9 billion: marine products 51.2%, industrial products 38.3%, agriculture 1.8%, and miscellaneous 8.7%. Partners--EU 74.8% (U.K. 18%, Germany 17%, Netherlands 11%, Spain 6%, Denmark 5%); U.S. 10.8% ($421 million); Japan 2.1%. Imports (2006)--$6.9 billion: industrial supplies 27%; capital goods, parts, accessories 23%; consumer goods 20%; transport equipment 21.1%; food and beverages 9%; fuels and lubricants 8%. Partners--EU 64.7% (Germany 13%, Denmark 9%, U.K. 8%, Sweden 7%, Netherlands 7%); U.S. 12.8% ($208 million); EFTA 9%; Japan 4.1%.

GEOGRAPHY
Iceland is a volcanic island in the North Atlantic Ocean east of Greenland and immediately south of the Arctic Circle. It lies about 4,200 kilometers (2,600 mi.) from New York and 830 kilometers (520 mi.) from Scotland. About 79% of Iceland's land area, which is of recent volcanic origin, consists of glaciers, lakes, a mountainous lava desert (highest elevation 2,000 meters--6,590 ft.--above sea level), and other wasteland. About 28% of the land is used for grazing, and 1% is cultivated. The inhabited areas are on the coast, particularly in the southwest where about 60% of the population lives. Because of the Gulf Stream's moderating influence, the climate is characterized by damp, cool summers and relatively mild but windy winters. In Reykjavík, the average temperature is 11°C (52°F) in July and -1°C (30°F) in January.

ICELAND ECONOMY
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 the 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 and aluminum production), 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. In 2005 the economy boomed, growing 5.8%, and inflation was close to the Central bank's upper limit (4%) at 3.95%, while unemployment decreased to about 3.2%. The economy suffered a setback in spring 2006 when credit rating agencies and other international financial firms released a number of reports raising questions about the state of the Icelandic economy and the activities and stability of Iceland's major banks. These reports were widely covered in the international financial press, causing a marked drop in the value of the Icelandic krona and of shares listed on the Icelandic stock exchange. Since then the situation has calmed down, but there is no question that certain imbalances have emerged in the Icelandic economy, including a high current account deficit, high inflation and high private sector debt levels. It remains an open question whether these imbalances render Iceland particularly vulnerable to an economic crisis. Foreign confidence in the Icelandic economy is important to maintain the country's skillful use of foreign capital. Icelandic businessmen have become well known for risk taking, decisiveness, and swiftness in their investments. Wealthy Icelanders have successfully invested overseas, especially in the retail and real estate markets in Denmark and U.K. and telecom, pharmaceutical, banking, and financial sectors in Eastern Europe. This recent success has for the first time created a "super-rich" elite in Icelandic society.

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 Kárahnjúkar hydroelectric project is the largest single station, with capacity of 690 megawatts (mw). The other major hydroelectric stations are at Búrfell (270 mw), 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 450 people and recently expanded to a production capacity of 220,000 tons per year. A new smelter owned by Alcoa, another U.S.-owned aluminum company, began operations in June 2007. The smelter will have a production capacity of 346,000 tons per year when fully operational. The Kárahnjúkar hydroelectric power plant, completed in early 2007, was built in connection with Alcoa's smelter. A total of over $2 billion has been invested in the power plant and smelter, 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 Reykjavík 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 in 1970 and entered into a free trade agreement with the European Community in 1973. Under the European Economic Area 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.

DEFENSE
The U.S. and Iceland signed a bilateral agreement in 1951 stipulating that the U.S. would make arrangements for Iceland's defense on behalf of NATO and providing for basing rights for U.S. forces in Iceland. In March 2006 the U.S. announced it would continue to provide for Iceland's defense but without permanently basing forces in the country; Naval Air Station Keflavik closed in September 2006 after 55 years. The Government of Iceland expressed disappointment, and even opposition politicians opposed to the U.S. military presence criticized the manner of the closing, but bilateral discussions ensued to explore new ways of ensuring the country's security, with an emphasis on a "visible defense." Negotiations concluded with a Technical Agreement on base closure issues (e.g., facilities return, environmental cleanup, residual value) signed on September 29, 2006, and a "Joint Understanding" on future bilateral security cooperation (focusing on defending Iceland and the North Atlantic region against emerging threats such as terrorism and trafficking) signed by the Secretary of State, Prime Minister Haarde and Foreign Minister Sverrisdóttir in Washington on October 11, 2006. The U.S. also cooperated with local officials to mitigate the impact of job losses at the Air Station, notably by encouraging U.S. investment in industry and tourism development in the Keflavík area. The Government of Iceland announced in spring 2007 that a large portion of the former base site would be converted into the university-level "Atlantic Center of Excellence" with operations scheduled to begin in fall 2007.

Cooperative activities in the context of the new agreements began almost immediately, with the arrival of the amphibious ship USS Wasp in Reykjavík on October 12, 2006 (the first U.S. Navy port visit since 2002) to demonstrate the Navy's rapid reaction capability and to support counterterrorism training by units of Iceland's Coast Guard and police. In November 2006 a U.S. Navy P-3 patrol aircraft arrived at Keflavík for joint search and rescue, disaster surveillance, and maritime interdiction training. Further joint endeavors, including a U.S.-led air defense exercise, are slated for the summer of 2007.

The Government of Iceland contributes financially to NATO's international overhead costs and recently has taken a more active role in NATO deliberations, planning, and peacekeeping. Iceland hosted the NATO Foreign Ministers' Meeting in Reykjavík in June 1987 and again in May 2002. Iceland hosted the NATO Military Committee in April 2007 and will host the NATO Parliamentary Assembly in October 2007.