Krugman has been a harsh critic of the Bush administration and the Republican Party in The New York Times, where he writes a regular column and has a blog called "Conscience of a Liberal."
He has come out forcefully against John McCain during the economic meltdown, saying the Republican candidate is "more frightening now than he was a few weeks ago" and earlier that the GOP has become "the party of stupid."
"Krugman is not only a scientist but also an opinion maker," economics prize committee member Tore Ellingsen said. He added that Krugman's analyses tend to back free trade and his research gives no "support for protectionism."
American researchersThe 55-year-old American economist was the lone winner of the 10 million kronor ($1.4 million) award and the latest in a string of American researchers to be honored. It was only the second time since 2000 that a single laureate won the prize, which is typically shared by two or three researchers.
The Royal Swedish Academy of Sciences praised Krugman for formulating a new theory to answer questions about free trade and said his theory has inspired an enormous field of research.
"What are the effects of free trade and globalization? What are the driving forces behind worldwide urbanization? Paul Krugman has formulated a new theory to answer these questions," the academy said in its citation.
"He has thereby integrated the previously disparate research fields of international trade and economic geography," it said.
The award, known as the Nobel Memorial Prize in Economic Sciences, is the last of the six Nobel prizes announced this year and is not one of the original Nobels. It was created in 1968 by the Swedish central bank in Alfred Nobel's memory.
Besides his work as an economist at Princeton University in New Jersey, where he has been since 2000, Krugman has written for publications including Foreign Affairs, the Harvard Business Review and Scientific American.
Currency crisesCommenting on the global economic meltdown, Krugman told a news conference in Stockholm by telephone from the United States that some of his research was linked to currency crises and related issues.
"This is terrifying," he said, comparing it to the financial crisis that gripped Asia in the 1990s. "I had never thought that in my lifetime I would see anything that resembles the Great Depression, but this in fact does."
He said winning the Nobel award won't change his approach to research and writing.
"The prize will enhance visibility," he said, "but I hope it does not lead me into going to a lot of purely celebratory events, aside from the Nobel presentation itself."
Showing a sense of humor, Krugman's The New York Times blog had an entry early Monday that read "A funny thing happened to me this morning...." with a link to the Nobel announcement.
Krugman graduated with a bachelor's degree from Yale in 1974 and received a Ph.D. from MIT in 1977. Besides teaching at Yale and MIT, he also taught at Stanford.
Krugman's work on new trade theory also garnered him the John Bates Clark medal from the American Economic Association in 1991. That prize is given every two years to an economist under the age of 40.
The Nobel citation said Krugman's approach is based on the premise that many goods and services can be produced at less cost in long series, a concept known as economies of scale. His research showed the effects of that on trade patterns and on the location of economic activity.
Britain praisedIn contrast to his treatment of U.S. financial officials, Krugman has praised leaders in Britain for their response to the global financial crisis.
In an Oct. 13 column in the The New York Times, Krugman wrote that British Prime Minister Gordon Brown and Chancellor Alistair Darling "defined the character of the worldwide rescue effort, with other wealthy nations playing catch-up."
Whereas U.S. Treasury Secretary Henry Paulson rejected a "sort of temporary part-nationalization" involving governments giving financial institutions more money in return for a share of ownership, the British government "went straight to the heart of the problem ... with stunning speed."
Krugman said the major European economies have "in effect declared themselves ready to follow Britain's lead, injecting hundreds of billions of dollars into banks while guaranteeing their debts."
"And whaddya know," Krugman continued, "Mr. Paulson - after arguably wasting several precious weeks - has also reversed course, and now plans to buy equity stakes rather than bad mortgage securities."
Krugman introduced his theory in 1979 in a 10-page article in the Journal of International Economics.
It posited that because consumers want a diversity of products, and because economies of scale make production cheaper, multiple countries can build a product such as cars. A nation like Sweden can build its own car brands for both export and sale at home, while also importing cars from other countries.
Economic geographyThe article also outlined a new theory of economic geography. Krugman's idea was that if two countries were exactly alike, except one had a larger population, real wages would be somewhat higher in the more populous country because companies there could make better use of economies of scale, creating a greater diversity of goods, lower prices, or both.
Because this enhances the welfare of consumers in that country, its population would increase as more people moved there, which would lead to additional increases in real wages.
The Nobel Prizes in medicine, chemistry, physics, literature and economics will be handed out in Stockholm by Sweden's King Carl XVI on Dec. 10, the anniversary of prize founder Alfred Nobel's death in 1896. The Nobel Peace Prize will be handed out in Oslo, Norway, on the same date.
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