Israel has an export oriented economy. Its main sources of income are:

High Tech exports – Israel's high tech industry is one of the major income generators for the country's economy. The reasons behind the success of this sector is the availability of highly educated human resources, infrastructure and Research and Development financing by the Israeli government for this industry. Furthermore the high tech sectors products are high value products (in terms of monetary value). A sizable number of Israel's customers are western companies.

Polished diamonds – Israel is one the major centres of diamond cutting and polishing in the world. Sale of polished diamonds usually include very high profit margins. Majority of products from this sector are exported.

Tourism – The holy land has historic sites relating to the history of the world's most followed religions (Islam, Christianity and Judaism). Such religious sites are large tourist attractions. Furthermore Israel has beautiful beaches, scenic mountains and developed leisure facilities to cater tourist needs. This industry has been an important foreign currency generator for the Israeli economy.

Defence Products – Israel is one of the world's top five exporters of defence products. Years of experience in warfare, plus investment by the government in the development of the national defence industry has enabled the country to produce world class defence products. Areas of strength are: Unmanned Air Vehicle production, Avionics upgrade packages, Aircraft missile technology and Electronic surveillance technology. Israel also has buoyant Aviation industry which produces business jets and is also involved in the upgrade of US and Russian fighter jets and helicopters.

Agriculture- Israel's leaders encouraged the development of the agriculture industry as means of reducing the country's dependency on food imports, especially in times of war. Therefore large investments were made in the development of new agriculture and irrigation techniques suited for Israel's desert conditions. This capability has enabled Israel to have one of the most advanced agriculture industries with exports such as fresh fruit, as well as agriculture and irrigation training and equipment.

Construction – The Israeli construction and real estate sector has also been one of the drivers of the Israeli economy. As a growing immigrant country, demand for housing has usually been high. Furthermore investment by diaspora Jewry who wish to have a holiday home in Israel, growing tourism sector plus the government's expansion of housing in settlements have all contributed to the growth of the construction sector.

Foreign investment – Investment by foreign companies and individuals in Israel's economy is another important driver for the Israeli economy. As Israel is not rich in natural resources and its economy has high outgoing costs, subsequently foreign capital is viewed as an important catalyst for the development of the economy.

The Israeli economy has also faced a number of major challenges.

One of them is its dependency on regional events. Consequently the start of the second intifada in the year 2000 lead to a reduction in the level of tourism and fall in the level of investment and production, especially in the construction sector. Furthermore the conflict lead to a sharp increase in the defence expenditure. The conflict also lead to decrease in trade with Arab countries which was growing in previous years. As a result in the year 2001 Israel's GDP shrank by 1%. The lack of a sizable home market and thus Israel's dependency on exports also hurts the economy in times of downturn in the global economy. This was felt especially after the first half of year 2000 when the global technology market started to detract. The negative impact of this downturn was felt by majority of Israeli companies.

The start of the intifada and downturn in the global economy lead to an increase in the level of unemployment in Israel which is a an economic and social problem in Israel with figures reaching as high as 10% in 2005. Israel's debts and its subsequent debt servicing costs which is estimated to be as high as 5% of the country's GDP are a continuing burden on its balance of payment balances and on the country's budget in general. Furthermore due to the country's need to import majority of its raw material, weapons and consumer goods, its balance of payments has been pushed into deficit on many occasions. One of the main constraints of the Israeli economy is the large size of the public sector and the size of the government's participation in a number of key sectors. A number of Israel's public sector organisations (except the Defence organisation) under-perform and are over sized. However due to strong union opposition the government has been unable to reduce their staff size or to streamline their processes. Furthermore a sizable of Israel's privatised industries and businesses are run by a small group of cartel like companies and family holdings. Such groups stifle competition in the economy.

Since becoming finance minister in early 2003, Benyamin Netanyahu has embarked on a plan to reform the Israeli economy. His plan includes streamlining oversized government organisations, reducing taxes paid by Israeli citizens, privatisation of state industries and reduction of welfare benefits. Israel's powerful trade unions and socialist political parties such as the Labour party have placed a number of obstacles in the path of the Finance Minister's reforms. However support has been provided for his reform plans from a number of international finance organisations (especially sovereign credit rating agencies) as well as the Israeli private sector. It is expected that the appointment of Stanley Fisher (who is considered as an ally of the Finance Minister) as the new governor of the Bank of Israel will provide further momentum for the implementation of the reform plans.

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