Krugman Wins Nobel Prize in Economics

A year ago in my trade theory and policy class my professor mentioned how Paul Krugman had done a lot of work on trade patterns, but then stopped to write editorials for the New York Times. It was a back handed compliment, basically saying if Krugman had continued with his work he might have had a shot at a Nobel Prize in Econ one day. I'm not sure if you can call that University of Chicago arrogance or ignorance from my professor.

So with that snarky commentary two thoughts entered my mind:
1) Paul Krugman will never win a Nobel Prize.
2) Paul Krugman has done work that might have lead him to win a Nobel Prize.

I had never really considered that, in part because my econ back ground has been more recent, and because I don't handicap the Nobel Prize in Economics.

So I was surprised this morning to find out that Krugman had been award the prize. Congratulations to him.

What did Krugman win for? Good question... I'm not the perfect person to ask, and I would have to use a graph which really is no good on a blog, but here are a few explanations. Starting with the The Royal Swedish Academy of Sciences reasoning:

Traditional trade theory assumes that countries are different and explains why some countries export agricultural products whereas others export industrial goods. The new theory clarifies why worldwide trade is in fact dominated by countries which not only have similar conditions, but also trade in similar products – for instance, a country such as Sweden that both exports and imports cars. This kind of trade enables specialization and large-scale production, which result in lower prices and a greater diversity of commodities.

Ahh, what the hell, I'll take a stab at it in four sentences: "Traditional" free trade theory says that Country A will specialize in making guns (Brand L, M and N) if it has a competitive advantage over Country B, as a result B will make butter. What Krugman theorized is that Country B could gain a competitive advantage in making guns if it subsidized the process (brands X and Y)—and this is especially true of large or rich countries. As Country B makes more and more guns, this gives consumers a choice, or diversity, in the band of gun they can buy. Consumers like this because they have more choice, even if Country A only makes Brand L and M now, consumers now have more choices—L, M, X and Y.

And a few other blogs and articles that might help:
Blogging Stocks

Marginal Revolution (some really good links in here, and I'm going to add them to our policy blogs)

Time does an okay job at explaining everything.

And here is Krugman's blog.

And not to make myself or anyone else feel like shit, Krugman basically won for work he did when he was about 26 or 27 years old.