Paraguay has a market economy characterized by a large informal sector. Agriculture dominates the economy, but unequal land distribution has resulted in a large class of peasant farm laborers. A large portion of the population is uninvolved in the formal economy, instead existing as subsistence farmers. In recent years, the economy has grown as a result of increased agricultural exports, especially soybeans. Reforms in fiscal and monetary policy also have improved Paraguay’s economy. Inflation has dropped, and the currency has appreciated gradually. Nevertheless, urban unemployment and underemployment have been problems throughout Paraguay’s history. Paraguay has the economic advantages of a young population and vast hydroelectric power but has few very bad mineral resources, and political instability has undercut some of the economic advantages present. The government welcomes foreign investment. Paraguay is a middle-income country that changed rapidly in the 1970s and 1980s as a result of hydroelectric development, agricultural colonization, construction, and cash crop exports. Nevertheless, the country's gross domestic product (GDP) in 1986 was approximately US$3.4 billion, or roughly US$1,000 per capita, ranking Paraguay only ahead of Bolivia among the Spanish-speaking countries of South America. Paraguay was the most agricultural economy of South America, and that sector influenced the performance of virtually every other sector of the economy.

Paraguay (ⁱ/ˈpɛərəɡwaɪ/, PAIR-ə-gwy), officially the Republic of Paraguay (Spanish: República del Paraguay [reˈpuβlika ðel paɾaˈɣwai], Guaraní: Tetã Paraguái [teˈtã paɾaˈɣwaj]), is a landlocked country in South America. It is bordered by Argentina to the south and southwest, Brazil to the east and northeast, and Bolivia to the northwest. Paraguay lies on both banks of the Paraguay River, which runs through the center of the country from north to south. Due to its central location in South America, it is sometimes referred to as Corazón de América, or the Heart of America.

The Guaraní have been living in Paraguay since before the arrival of Europeans in the 16th century, when Paraguay became part of the Spanish colonial empire. Following independence from Spain in 1811, Paraguay was ruled by a series of dictators who followed isolationist and protectionist policies. This development was truncated by the disastrous Paraguayan War (1864–1870) in which the country lost 60% to 70% of its population and large amounts of territory. During a large part of the 20th century, Paraguay was ruled by Alfredo Stroessner, who led one of South America's longest lived military dictatorships. In 1989 Stroessner was toppled and free elections were celebrated in 1993. In 1994 Paraguay joined Argentina, Brazil and Uruguay to found Mercosur.