In its citation, the Nobel academy said: "What are the effects of free trade and globalisation? What are the driving forces behind worldwide urbanisation? Paul Krugman has formulated a new theory to answer these questions.
"He has integrated the previously disparate research fields of international trade and economic geography."
Krugman also won the John Bates Clark medal from the American Economic Association in 1991 for his work on new trade theory.
His work explains why countries that not only have similar conditions but also trade in similar products dominate trade.
"This kind of trade enables specilisation and large-scale production, which result in lower prices and greater diversity of commodities," the academy said.
Krugman is known for his works Peddling Prosperity and International Economics: Theory and Policy.