[36] Due to its geographical location, transit services are highly developed, along with timber and wood processing, agriculture and food products, and manufacturing of machinery and electronic devices.

Triggered by the collapse of Parex Bank, the second largest bank, GDP decreased by almost 18% in 2009,[37] and the European Union, the International Monetary Fund, and other international donors provided substantial financial assistance to Latvia as part of an agreement to defend the currency's peg to the euro in exchange for the government's commitment to stringent austerity measures.

For centuries under Hanseatic and German influence and then during its inter-war independence, Latvia used its geographic location as an important east–west commercial and trading centre.

Industry served local markets, while timber, paper and agricultural products were Latvia's main exports.

After contracting substantially between 1991 and 1995, the economy steadied in late 1994, led by a recovery in light industry and a boom in commerce and finance.

Latvia's state budget was balanced in 1997 but the 1998 Russian financial crisis resulted in large deficits, which were reduced from 4% of GDP in 1999 to 1.8% in 2003.

The financial crisis of 2007–2008 severely disrupted the Latvian economy, primarily as a result of the easy credit bubble that began building up during 2004.

The bubble burst leading to a rapidly weakening economy, resulting in a budget, wage and unemployment crisis.

The Latvian economy entered a phase of fiscal contraction during the second half of 2008 after an extended period of credit-based speculation and unrealistic inflation of real estate values.

[45] Paul Krugman, the Nobel Laureate in economics for 2008, wrote in his New York Times Op-Ed column for 15 December 2008: "The acutest problems are on Europe's periphery, where many smaller economies are experiencing crises strongly reminiscent of past crises in Latin America and Asia: Latvia is the new Argentina".

[47] Financial economist Michael Hudson has advocated for redenominating foreign currency liabilities in Latvian lats before devaluing.

[48] The economic situation has since 2010 improved,[49] and by 2012 Latvia was described as a success by IMF managing director Christine Lagarde[50] showing strong growth forecasts.

Dramatic rises in the cost of energy, the need to seek alternative sources of gas and oil as well as logistics issues resulted in inflation averaging 17.2% in 2022 before falling back to single digits in 2023.

Eager to join Western economic institutions like the World Trade Organization, OECD, and the European Union, Latvia signed a Europe Agreement with the EU in 1995 with a 4-year transition period.

Latvia and the United States have signed treaties on investment, trade, and intellectual property protection and avoidance of double taxation.