(Credit: Office of Communications, Princeton University)

US economist Paul Krugman has been awarded the 2008 Nobel prize for economics ''for his analysis of trade patterns and location of economic activity.''

A prominent economist who writes columns for the New York Times, Krugman is a well-known critic of the Bush administration and blames the current financial market meltdown on its zeal for deregulation and loose fiscal policies.

Krugman, an advocate for stringent regulations for the financial sector, had once said that weak banks in India should be closed.

"It may sound hard-hearted, but you cannot keep unsound financial institutions operating simply because they provide jobs. There can be a huge amount of damage a bad bank can create. There is a cruelty to our market system, but that cruelty cannot be eliminated. The alternative is fraught with danger, that of carrying on with the weak banks," he said.

During his visit to India in the midst of the peak of the Asian crisis, he had  suggested adequate capitalisation of banks, closing down weak ones and leaving the convertibility programme where it was.

"Leave currency convertibility where it is. It's an extremely dangerous world out there. The risks of getting caught in the pinball game are too high,'' he had said.

He had also underscored the need for prudent capital controls for emerging economies as a measure of abundant caution.

"I would much want to maintain, for the long term, prudential inward capital controls. Outward controls are all right, but inward controls are useful for the long term," he had said.

India, Krugman had said, avoided the worst partly in the fact that the restrictions discouraged both inflows and outflows of short-term capital.

"No developing country with large-scale mobility in short-term capital is immune to these crises. India, fortunately, did not make the same mistakes. Had the crisis come, there would have been economic devastation, and the crisis would have fed on itself," Krugman had said.

The Nobel prize committee said the 10 million crown ($1.4 million) award recognises Krugman's work that helps explain why some countries dominate international trade and a new theory that explains what drives worldwide urbanisation.

Patterns of trade and location have always been key issues in the economic debate and Paul Krugman, the release said, has formulated a new theory to explain the effects of globalisation on trade and the forces driving urbanisation.

''He has thereby integrated the previously disparate research fields of international trade and economic geography,'' the committee said in the release.

Krugman, the release noted, based his approach on the premise that many goods and services can be produced more cheaply in long series, a concept generally known as economies of scale.

While consumers demand a varied supply of goods, large-scale production for the world market replaces small-scale production for a local market,  forcing firms with similar products to compete with one another, it added.

''Traditional trade theory assumes that countries are different and explains why some countries export agricultural products whereas others export industrial goods. The new theory clarifies why worldwide trade is in fact dominated by countries which not only have similar conditions, but also trade in similar products – for instance, a country such as Sweden that both exports and imports cars. This kind of trade enables specialisation and large-scale production, which result in lower prices and a greater diversity of commodities,'' the release noted.

''Economies of scale combined with reduced transport costs also help to explain why an increasingly larger share of the world population lives in cities and why similar economic activities are concentrated in the same locations. Lower transport costs can trigger a self-reinforcing process whereby a growing metropolitan population gives rise to increased large-scale production, higher real wages and a more diversified supply of goods, which, in turn, stimulates further migration to cities,'' the release said.

Krugman's theories have shown that the outcome of these processes can well be that regions become divided into a high-technology urbanised core and a less developed "periphery".

Krugman, 55, holds a Masters Degree in Economics from Cambridge, US and a Ph.D from the Massachusetts Institute of Technology and has been Professor of Economics and International Affairs at Princeton University since 2000. He has written 20 books and more than 200 papers.

He has also taught at Yale, MIT and Stanford University. His current work centres on economic and currency crises.

The economics prize, officially called the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, was established in the 1960s and is not part of the original group of awards set out in Alfred Nobel's 1895 will.