Ramstedt was born in Ekenäs in Southern Finland. As an undergraduate, he attended the University of Helsinki, where he studied Finno - Ugric languages under Eemil Nestor Setälä. He was later attracted to the study of Altaic languages and went to Mongolia to study the Mongolian language at the suggestion of Otto Donner. He later became professor extraordinarius in Altaic languages at the same university.

During his expeditions in Mongolia, Ramstedt became a personal friend to highly educated Buryat Mongol Agvan Dorzhiev who acted as full representantive of 13th Dalai Lama, Thubten Gyatso and was a full member in Tibetan Government, Kashag as Minister of Treasures (Finances). Ramstedt was one of the few foreigners who was invited to visit Lhasa, but unfortunately the coming events prevented his visit to Tibet. In 1911 the Mongolian delegation in St.Petersburg asked Ramstedt to act as mediator with the Imperial Russian Government to support the Mongolian Independence from the Chinese Empire. He managed to confirm the Russians of the good will of Mongolian representantives and they supplied 15.000 modern rifles to the Mongolians to start the uprising against the Chinese rule in Mongolia.

In 1912, when Ramstedt was in Urga, Mongolia, the Mongol leaders; Da-Lama, Handan Dordzhi, and Haisan - Gung asked him to help with the negotiations with the Russian representantives which did not accept the Mongol idea to unify Urjanhai, Mongolia (including also Inner Mongolia) and Buryat Mongolia to one modern Mongol State. Ramstedt advised the Mongol leaders to seek also international recognition for their state from other states, particularly Japan, Britain, Germany, France and United States. Ramstedt did not know anything of the secret agreement between Russia and Japan where Inner Mongolia was promised by both States to be kept as a part of China.

Following the independence of Finland in 1917, he became Finland's first envoy to Japan, as a Chargé d'affaires, from 1920 to 1929, during which he was a frequent guest lecturer at Tokyo Imperial University, where he influenced Kunio Yanagita, Izuru Shimura, Kyōsuke Kindaichi, and Shimpei Ogura. He acquired command of the Japanese language remarkably quickly.

Ramsted is one of the earliest esperantist in Finland, learning it in 1891. He became chairman of the Finnish Esperanto Society. During his stay in Japan, he joined the Esperanto movement there, led by the Japanese Esperanto Institute. Due to his speech in Japanese, young poet Kenji Miyazawa decided to learn Esperanto.

Ramstedt was a pioneer in the study of numeral etymologies of a number of Asian language families (Turkic, Mongolian, Tungusic, as well as the possible isolate Korean). He also did extensive work on the general etymological history of Korean.

Ramstedt died in Helsinki.