He took the award for his work in mapping why some countries dominate international trade due to what is commonly called "economies of scale".
A professor of economics at Princeton University, New Jersey, Krugman is seen as a critic of the US policies that have lead to the current financial crisis.
Krugman had regularly criticised the Republican party and the leadership of George Bush, the US president, in his column in The New York Times newspaper.
The 55-year-old economist took the prize of 10 million kronoer ($1.4m) on Monday.
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.
Source : Al Jazeera English