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Henderson on Krugman's Nobel:

David Henderson discusses the importance of Paul Krugman's trade work in today's WSJ.

In the late 1970s, Mr. Krugman noticed that the accepted model economists used to explain patterns of international trade did not fit the data. The Hecksher-Ohlin model predicted that trade would be based on such factors as the ratio of capital to labor, with "capital-rich" countries exporting capital-intensive goods and importing labor-intensive goods from "labor-rich" countries. Mr. Krugman noticed that most international trade takes place between countries with roughly the same ratio of capital to labor. The auto industry in capital-intensive Sweden, for example, exports cars to capital-intensive America, while Swedish consumers also import cars from America.

Mr. Krugman's explanation is based on economies of scale. Both Volvo and General Motors reduce average costs by producing a large output in particular niches of the market. In presenting his trade model, Mr. Krugman planted the seeds for his later work in economic geography, in which he tried to explain the location of economic activity.

He summarized his basic finding (in "Geography and Trade," 1992) as follows: "Because of economies of scale, producers have an incentive to concentrate production of each good or service in a limited number of locations. Because of the cost of transacting across distance, the preferred locations for each individual producer are those where demand is large or supply of inputs is particularly convenient -- which in general are the locations chosen by other producers. Thus [geographical] concentrations of industry, once established, tend to be self-sustaining."

Related Posts (on one page):

  1. Henderson on Krugman's Nobel:
  2. Krugman Wins Nobel Prize:
byomtov (mail):
Look out. Here come the KDS sufferers.
10.14.2008 4:45pm
SupremacyClaus (mail) (www):
Simplistic question. Isn't capital a stored form of labor? didn't every penny of capital come from the labor of a human?

Even if you find a diamond in the sand, isn't that increased wealth dependent on massive labor and knowledge, for the infrastructure supporting the value of diamonds? If a wolf found the diamond, wouldn't it be worthless to the wolf or the pack? And all the value comes from human effort.

So the theft of money is really the theft of labor and really, human life.
10.14.2008 4:55pm
EH (mail):
So the theft of money is really the theft of labor and really, human life.
That's about as reliably logical as my "McCain might be gay!" comment from yesterday.
10.14.2008 5:03pm
Al Maviva:
Hmmm. So you could sum it up by saying, "Krugman is the economist who discovered a model showing that there's no money in shipping coal to Newcastle - not in the foreseeable future, anyhow."

Clever.
10.14.2008 5:07pm
The Unbeliever:
Does anyone actually use Krugman's economic theories as the standard within their area? I study economics as a hobby and I've never heard anyone reference him as a useful source within the realm of international trade.

But then again, I never heard anyone call Yasser Arafat a credible agent of peace until he was given a Nobel prize, so what do I know.
10.14.2008 5:57pm
Joe Bingham (mail):
sigh. when will adler quit with the republican propaganda?
10.14.2008 6:07pm
byomtov (mail):
I study economics as a hobby and I've never heard anyone reference him as a useful source within the realm of international trade.

Study harder. Among other things, his textbook, "International Economics," written with Maurice Obstfeld, is one of the standards in the area.
10.14.2008 6:13pm
xx:
Unbeliever: Yes, he's one of the first (academic) names I associate with international trade.
10.14.2008 6:20pm
CB55 (mail):
The Unbeliever:

Keep your day job and your hobby. Try not to write a book on both in light of economics.
10.14.2008 7:03pm
Anderson (mail):
Simplistic question. Isn't capital a stored form of labor? didn't every penny of capital come from the labor of a human?

There is a big fat book you can read on the subject, though I would advise against it.
10.14.2008 7:40pm
Dave N (mail):
I agree that Krugman is a first-rate economist. I also think he is a fourth-rate NYT columnist. I hope he received his Nobel Prize because of the the former rather than the latter--particularly since he is better known to most non-economists for the latter rather than the former.
10.14.2008 7:58pm
guest890:
International trade is so 20th century. We all know the real reason he got the Nobel: interstellar trade.
10.14.2008 10:08pm
David Warner:
guest890,

"We all know the real reason he got the Nobel: interstellar trade."

My faith in Krugman is restored after lo these many years. Glad to know it was Carl, not Karl, who moved his heart in youth.

Then again, evidently he was working in 1978 for the reelection of Proxmire, father of the CRA of 1977. Was Krugman there at its birth? First we learn that Deep Throat was the technicality that sprung Ayers. Now this. Were the 70's just one big bad dream?
10.15.2008 4:34am