Myrdal was born on 6 December 1898 in Gustafs, Sweden, to Karl Adolf Pettersson (1876–1934), a railroad employee, and his wife Anna Sofia Karlsson (1878–1965). He took the name Myrdal in 1914 after his ancestors' farm Myr in Dalarna.

Gunnar Myrdal was at first fascinated by the abstract mathematical Models coming into fashion in the 1920s, and helped found the Econometric Society in London. Later, however, he accused the movement of ignoring the Problem of distribution of wealth in its obsession with economic growth, of using faulty statistics and substituting Greek letters for missing data in its formulas and of flouting logic. He wrote, "Correlations are not explanations and besides, they can be as spurious as the high correlation in Finland between foxes killed and divorces." Professor Myrdal was an early supporter of the theses of John Maynard Keynes, although he maintained that the basic idea of adjusting national budgets to slow or speed an economy was first developed by him and articulated in his book Monetary Economics, published in 1932, four years prior to Keynes' General Theory of Employment, Interest and Money.

Gunnar Myrdal graduated with a law degree from Stockholm University in 1923 and a doctorate in economics in 1927. In 1919, he met Alva Reimer, whom he married in 1924.

Myrdal was married to Politician and diplomat Alva Myrdal in 1924, and together had two daughters, Kaj Fölster (mother of Swedish Economist Stefan Fölster) and Sissela Bok, and a son, Jan Myrdal.

Between 1925 and 1929 he studied in Britain and Germany. He was a Rockefeller Fellow and visited the United States in 1929–1930. During this period he published his first books, including The Political Element in the Development of Economic Theory. Returning to Europe, he served for one year as associate professor in the Graduate Institute of International Studies, Geneva, Switzerland.

In Gunnar Myrdal's doctoral dissertation, published in 1927, he examined the role of expectations in price formation. His analysis strongly influenced the Stockholm school. He built on Knut Wicksell's theories of cumulative process of endogenous money, stressing the importance of Knightian uncertainty and Ex ante and Ex post expectations role in the economic process.

He became a Social Democratic Member of Parliament from 1933 and from 1945 to 1947 he served as Trade Minister in Tage Erlander's government. During this period he was heavily criticised for his financial agreement with the Soviet Union. At the same time he was accused of being responsible for the Swedish monetary crisis in 1947.

He coauthored with his wife, Alva Myrdal, the Crisis in the Population Question (Swedish: Kris i befolkningsfrågan, 1934). The work of Gunnar and Alva inspired policies adopted by the Minister of Social Affairs, Gustav Möller, to provide social support to families.

Gunnar Myrdal headed a comprehensive study of sociological, economic, anthropological and legal data on race relations in the United States funded by the Carnegie Corporation, starting in 1938. The result of the effort was Gunnar Myrdal's best-known work, An American Dilemma: The Negro Problem and Modern Democracy, published in 1944, written with the collaboration of R. M. E. Sterner and Arnold Rose. He characterized the Problem of race relations as a dilemma because of a perceived conflict between high ideals, embodied in what he called the "American Creed," on the one hand and poor performance on the other. In the generations since the Civil War, the U.S. had been unable to put its human rights ideals into practice for the African-American tenth of its population. This book was cited by the U.S. Supreme Court in its 1954 decision in Brown v. Board of Education, which outlawed racial segregation in public schools. Myrdal planned on doing a similar study on gender inequality, but he could not find funding for this project and never completed it.

During World War II, Gunnar Myrdal was staunchly and publicly anti-Nazi. Together with his wife, Alva, he wrote Contact with America in 1941, which praised the United States' democratic institutions.

Gunnar Myrdal became the Executive Secretary of the United Nations Economic Commission for Europe in 1947. During his tenure, he founded one of the leading centers of economic research and policy development. After ten years in the position, Dr. Myrdal resigned as Executive Secretary in 1957. In 1956 and 1957, he was able to publish An International Economy, Problems and Prospects, Rich Lands and Poor and Economic Theory and Underdeveloped Regions. Myrdal was also a signatory of the 1950 UNESCO statement The Race Question, which rebuts the theories of racial supremacy and purity, and also influenced the Brown v. Board of Education decision. In 1956, Myrdal wrote the foreword for African American author Richard Wright's The Color Curtain: A Report on the Bandung Conference.

Between 1960 and 1967, he was a professor of international economics at Stockholm University. In 1961, he founded the Institute for International Economic Studies at the University. Throughout the 1960s, he worked on a comprehensive study of trends and policies in South Asia for the Twentieth Century Fund. The study culminated in his three-volume Asian Drama: An Inquiry into the Poverty of Nations, published in 1968. In 1970, he published a companion book called The Challenge of World Poverty, where he laid out what he believed to be the chief policy solutions to the problems he outlined in Asian Drama.

In 1967 Myrdal received an honorary doctorate from Sir George Williams University, which later became Concordia University.

In 1971 both he and his wife received honorary doctorates from Gustavus Adolphus College in Saint Peter, Minnesota.

During 1974-1975, he served as visiting professor at NYU.

Myrdal received an Honorary Doctorate from Heriot-Watt University in 1979.

Myrdal was hospitalized for two months before he died in a hospital in Danderyd, near Stockholm, on 17 May 1987. His daughter Kaj Fölster and his grandson, Janken Myrdal, were present.

Myrdal published many notable works, both before and after American Dilemma and, among many other contributions to social and public policy, founded and chaired the Stockholm International Peace Research Institute. Internationally revered as a father-figure of social policy, he contributed to social democratic thinking throughout the world, in collaboration with friends and colleagues in the political and academic arenas. Sweden and Britain were among the pioneers of a welfare state and books by Myrdal (Beyond the Welfare State – New Haven, 1958) and Richard Titmuss (Essays on “The Welfare State” – London, 1958) unsurprisingly explore similar themes. Myrdal's theoretical key concept "circular cumulative causation" contributed to the development of modern Non-equilibrium economics.

William Barber’s comment upon Myrdal’s work on monetary theory goes like this: