“To be absolutely, totally honest, I thought this day might come some day, but I was absolutely convinced it wasn’t going to be this day,” Mr. Krugman said in an interview on Monday. “I know people who live their lives waiting for this call, and it’s not good for the soul. So I put it out of my mind and stopped thinking about it.”
Mr. Krugman won the prize for his research, beginning in 1979, that explained patterns of trade among countries, as well as what goods are produced where and why.
Traditional trade theory assumes that countries are different and will exchange only the kinds of goods that they are comparatively better at producing — wine from France, for example, and rice from China.
This model, however, dating from David Ricardo’s writings of the early 19th century, was not reflected in the flow of goods and services that Mr. Krugman saw in the world around him. He set out to explain 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 his model, many companies sell similar goods with slight variations. These companies become more efficient at producing their goods as they sell more, and so they grow. Consumers like variety, and pick and choose goods from among these producers in different countries, enabling countries to continue exchanging similar products. So some Americans buy Volkswagens and some Germans buy Fords.
He developed this work further to explain the effect of transportation costs on why people live where they live. His model explained under what conditions trade would lead people or companies to move to a particular region or to move away.
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