Andorra’s economy was formerly based on pastoral farming and the processing of tobacco and timber. Tourism has boomed since the 1950s and now dominates the principality’s economic life. Tourists are drawn by the winter ski facilities, the cool summer climate, and the availability of duty-free goods. The Andorran government collects revenue through a small number of taxes and the sale of postage stamps. Immigration and investment have been encouraged by low tax rates.

Tourism, the mainstay of Andorra's tiny, well-to-do economy, accounts for roughly 80% of GDP. An estimated 9 million tourists visit annually, attracted by Andorra's duty-free status and by its summer and winter resorts. Andorra's comparative advantage has recently eroded as the economies of neighboring France and Spain have been opened up, providing broader availability of goods and lower tariffs. The banking sector, with its "tax haven" status, also contributes substantially to the economy. Agricultural production is limited by a scarcity of arable land, and most food has to be imported. The principal livestock activity is sheep raising. Manufacturing output consists mainly of cigarettes, cigars, and furniture. Andorra is a member of the EU Customs Union and is treated as an EU member for trade in manufactured goods (no tariffs) and as a non-EU member for agricultural products.