Though Bhutan's economy is one of the world's smallest, it has grown very rapidly with about 8% in 2005 and 14% in 2006. As of March 2006, Bhutan's per capita income was US$ 1,321 making it one of the fastest growing in South Asia. Bhutan's standard of living is growing faster than that of its neighbouring countries and is one of the highest in South Asia. Bhutan's small economy is based on agriculture, forestry, and the sale of hydroelectric power to India. Agriculture provides the main livelihood for more than 80% of the population. Agrarian practices consist largely of subsistence farming and animal husbandry. Handicrafts, particularly weaving and the manufacture of religious art for home altars are a small cottage industry and a source of income for some. A landscape that varies from hilly to ruggedly mountainous has made the building of roads, and other infrastructure, difficult and expensive. This, and a lack of access to the sea, has meant that Bhutan has never been able to benefit from significant trading of its produce. Bhutan currently does not have a railway system, though Indian Railways plans to link up southern Bhutan with its vast network under an agreement signed in January 2005. The historic trade routes over the high Himalayas, which connected India to Tibet, have been closed since the 1959 military takeover of Tibet (although smuggling activity still brings Chinese goods into Bhutan).

The industrial sector is minimal, production being of the cottage-industry type. Most development projects, such as road construction, rely on Indian contract labour. Agricultural produce includes rice, chilies, dairy (yak) products, buckwheat, barley, root crops, apples, and citrus and maize at lower elevations. Industries include cement, wood products, processed fruits, alcoholic beverages and calcium carbide.

Bhutan's currency, the ngultrum, is pegged to the Indian Rupee. The rupee is also accepted as legal tender in the country. Incomes of over Nu 100,000 per annum are taxed, but very few wage and salary earners qualify. Bhutan's inflation rate was estimated at about 3% in 2003. Bhutan has a Gross Domestic Product of around USD 2.913 billion (adjusted to Purchasing Power Parity), making it the 162nd largest economy in the world. Per capita income is around $1,400 (€1,170), ranked 124th. Government revenues total €122 million ($146 million), though expenditures amount to €127 million ($152 million). 60% of the budget expenditure, however, is financed by India's Ministry of External Affairs.[8] Bhutan's exports, principally electricity, cardamom, gypsum, timber, handicrafts, cement, fruit, precious stones and spices, total €128 million ($154 million) (2000 est.). Imports, however, amount to €164 million ($196 million), leading to a trade deficit. Main items imported include fuel and lubricants, grain, machinery, vehicles, fabrics and rice. Bhutan's main export partner is India, accounting for 87.9% of its export goods. Bangladesh (4.6%) and the Philippines (2%) are the other two top export partners. As its border with Tibet is closed, trade between Bhutan and China is now almost non-existent. Bhutan's import partners include India (71.3%), Japan (7.8%) and Austria (3%).

The existing paper currency is being revised and new notes are developed to replace the existing old ones. As of now, denominations of Ngultrum one and Ngultrum five have been introduced. Coins are also very much in use in Bhutan.