Lying in the Western Pacific Ocean, Vanuatu is made up of a chain of islands with diverse physical characteristics and economic potential. The islands range from small coral atolls to relatively large islands of volcanic origin. Nearly 80 percent of the population of Vanuatu live in villages, so subsistence production of food, housing, and other items is the mainstay of the household economy. Most households also participate in some cash production, mainly of agricultural products such as copra (dried coconut flesh), cocoa, and coffee. Recently, new items that have entered the village cash economy, and which are of relatively high value, are kava and squash.
The formal economy of Vanuatu is based mainly on agricultural products and services. Copra and coconut oil are produced on large-scale plantations as well as in the villages. Coconut plantations often have cattle as well. Other products common to the village economy are also produced in plantations, in particular cocoa and coffee. Fishing supplies the internal market and is also a source of export income.
Vanuatu regularly has a negative balance of trade , and this is balanced by the services sector. Tourism has been growing steadily in recent years, partly because of heavy promotion in nearby countries such as Australia
International aid accounts for about 35 percent of GDP and development expenditure since independence in 1980 has been mainly financed by aid. Australia is the largest aid donor, followed by Asian Development Bank, France, Japan, and New Zealand.