PAUL KRUGMAN’S NOBEL PRIZE.

PAUL KRUGMAN’S NOBEL PRIZE. Kids, Paul Krugman has won the Nobel Prize for Economics, and you can understand some of the ideas for which he won. This article in the Economist has a good introduction to some of his models, and I am tracking the article in what follows. Begin with one of the factual puzzles which Krugman addressed. Previous theories of international trade had predicted that countries that had different resource endowments would engage in trade. A country would export goods in which it had a comparative advantage (in terms of its factors of production) for goods in which it had a comparative disadvantage. The article gives the example of Portugal selling wine for which its climate is suited. The problem that had to be explained was that countries with similar resources engage in a lot of trade; more than half of Germany’s exports to France are things that France also exports to Germany. Krugman identified a number of factors which affect the location of companies and the directions of trade, including consumers’ desire for variety and economies of scale. (You could think of France and Germany as Volkswagen and Renault and get some feel for one possible solution.) One of the nice things about Krugman’s work is that there is a set of solutions depending on facts. He describes his model as a tool, but it could also be looked at as a set of tools. Here is a paper by Krugman (by way of the Marginal Revolution blog) which summarizes some of his ideas and shows the number of variables which enter into his models.