The invention discloses a production method of electrically melt yttrium oxide stabilized zirconia granulation powder which is profitable, green and environmentally friendly. The method comprises the following steps: adding zircon sand and Y-doped cubic zirconia powder (or Y-Zr powder) in reducing agent for mixing and electric smelting or directly adding baddeleyite for mixing and electric smelting, cooling, performing coarse crushing and fine crushing, screening, performing coarse grinding and fine grinding, performing wet grinding to generate pulp, performing surface modification, performing spray granulation, mixing evenly and packaging. The method of the invention uses Y-Zr powder as raw material, the technical process is simple and easy, the method does not discharge waste water, waste gas and waste residue; the equipment investment is less, the product quality meets user requirements, the production process does not adopt secondary electric smelting and high-temperature heat treatment and add stabilizing agent; and under the same conditions, compared with the stabilized Zr and granulation powder thereof which are produced by the current and popular technology, the granulation powder quality is higher, the performance is better and the cost is reduced by 30-40%.