An Introduction to Python by Guido van Rossum and Fred L. Drake, Jr. Paperback (6"x9"), 124 pages ISBN 0954161769 RRP £12.95 ($19.95) Sales of this book support the Python Software Foundation! Get a printed copy>>>

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6.1.1 The Module Search Path

When a module named ‘spam’ is imported, the interpreter searches for a file named ‘spam.py’ in the current directory, and then in the list of directories specified by the environment variable ‘PYTHONPATH’. This has the same syntax as the shell variable ‘PATH’, that is, a list of directory names. When ‘PYTHONPATH’ is not set, or when the file is not found there, the search continues in an installation-dependent default path; on UNIX, this is usually ‘.:/usr/local/lib/python’.

Actually, modules are searched for in the list of directories given by the variable sys.path which is initialized from the directory containing the input script (or the current directory), ‘PYTHONPATH’ and the installation-dependent default. This allows Python programs that know what they're doing to modify or replace the module search path. Note that because the directory containing the script being run is on the search path, it is important that the script not have the same name as a standard module, or Python will attempt to load the script as a module when that module is imported. This will generally be an error. See section 6.2, "Standard Modules," for more information.