Krugman, who teaches at Princeton University in New Jersey and also serves as a columnist with the New York Times newspaper, was cited "for his analysis of trade patterns and location of economic activity".
The committee which awards the Nobel economics prize emphasized Krugman's work in bringing together the two previously disparate fields of international trade and economic geography.
Krugman's theories help to explain, for example, the effects of free trade and globalization, as well as what lies behind the worldwide trend toward urbanization.
While traditional trade theory assumes countries are different, and thus export different goods and services, Krugman tries to explain why global trade is dominated by countries which have similar conditions and which trade in similar products.
His theory relies on the concept of ecomonies of scale, which holds that that many goods and services can be produced more cheaply when produced in mass volumes. In addition, Krugman postulates that consumers demand a wide range of goods, resulting in small-scale production for a local market being replaced by large-scale production for the world market.
Krugman earned his Ph.D. from the Massachusetts Institute of Technology (MIT) in 1977 and taught at Yale, MIT, UC Berkeley, the London School of Economics, and Stanford University before coming to Princeton University in 2000.
Unlike the other Nobel Prizes, which were specified in Nobel's will, the economic prize was created in 1968 in conjunction with the 300th anniversary of Sweden's central bank, the Riksbank.
The winner is chosen by the Swedish Royal Academy, while the prize itself is funded by the Riksbank.
As a result, it is officially known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.