The local economy in the town is based on the tourist hotels, local shops and restaurants, and the diving trade. Most of the foreign tourists are European, many from Scandinavia, Germany and the United Kingdom. The wider area produces some rubber and palm oil; there is also a small amount of subsistence agriculture.
Following the tsunami of December 2004 (see below) the local economy was devastated as it was in nearly all coastal towns hit by the wave. It is estimated that 60 percent of the resorts were mid-construction, with nearly 4,000 rooms already available. Most coastal resorts were either heavily damaged or completely demolished, resulting in a great loss of life and a major setback to the local tourist economy. At the time of the tsunami, Khao Lak was Thailand's fastest growing tourist destination.
December 2009 has marked the fifth anniversary of the tsunami and Khao Lak's economy has nearly bounced back. Most of the coastal resorts have completed their reconstruction or repairs and the tourism has flourished. Seaside and inland resorts are indicating full bookings during high seasonal months of November to March. Local population not affected or reliant on tourism have all but returned to normal lives. Fisheries and rubber plantations are thriving at levels equal to pre-tsunami
