Why Paul Krugman won the Nobel Prize in Economics

Why does Pakistan import Thai Jasmine rice and Thailand import Basmati rice? Both countries are major rice producers. The common sense explanation is the people of Pakistan and Thailand are fond of rice, and some Pakistanis like fragrant Thai rice and some Thai like Basmati rice.

Traditional trade theory assumes that countries will exchange only the kinds of goods that they are better at producing. In a simple trade model, France will offer its Agosta diesel submarines in exchange for Pakistan's basmati rice or jasmine rice, papayas and orchids from Thailand.

The real world is more complex, as interpreted by Paul Krugman, a professor at Princeton and an Op-Ed page columnist for The New York Times, who won the Nobel Memorial Prize in Economic Science for his “analysis of trade patterns and location of economic activity.”

According to Catherine Rampell's piece in the NYT, Paul Krugman showed why worldwide trade was dominated by a few countries that were similar to one another, and why a country might import the same kinds of goods it exported.

In Krugman’s model, many companies sell similar goods with slight variations. As they become more efficient they grow. Consumers like variety, and buy goods from among these producers in different countries, enabling countries to continue exchanging similar products. Many Americans buy Volkswagens and some Germans might even buy Fords.

Krugman explained the effect of transport costs on why people live in a particular place. His model explained under what conditions trade would attract people or companies to a particular region or to move away.

Mr. Krugman’s work has been praised for its simplicity and practicality — features economists are often criticized for ignoring.

“Some people think that something deep only comes out of great complexity,” said Maurice Obstfeldt, an economics professor at the University of California, Berkeley. “Paul’s great strength is to take something very simple and make something new and very profound.”

“I praise today’s prize as being deserving and even overdue, but more than that I reproach the Pulitzer committee, which owed him at least a couple of prizes in the past,” said Paul A. Samuelson, a previous winner of the Nobel in economic science. “Paul Krugman is the only columnist in the United States who has had it right on almost every count from the beginning.”