The municipal area stretches along the valley of the Wilde Gera river and its Lütsche tributary, northeast of the Thuringian Forest mountain range and the Rennsteig ridge.

From 1640 half of the estates were in possession of the Ernestine dukes of Saxe-Gotha, while the remaining Schwarzenburg parts from 1716 were ruled within the principality of Schwarzburg-Sondershausen.

The local population was largely involved in agriculture and forestry, but also in copper, silver and lead mining, as well as in glass production.

While in the mid 19th century, numerous people emigrated from the remote area to the United States, the local economy developed in the course of the industrialisation.

After their first appearance at the 1898 Leipzig Trade Fair, these figurines became increasingly popular throughout Germany, with Gräfenroda as a centre of manufacturing.