For a compact oriented manifold $X$ define $\chi (X)=I(\Delta,\Delta)$ where $\Delta$ is the diagonal in $X\times X$ and $I$ is the intersection number. How do I show that $\chi(X\times Y)=\chi(X)\cdot\chi(Y)$?
This boils down to showing that $$I(\{(x,y,x,y)| x\in X, y\in Y\}, \{(x,y,x,y)| x\in X, y\in Y\})=I(\{(x,x)|x\in X\},\{(x,x)|x\in X\})\cdot I(\{(y,y)|y\in Y\},\{(y,y)|y\in Y\})$$
But I'm not sure how to compute the intersection number on the left-hand side to get a product. (To begin with, if I denote by $\Delta$ the diagonal in $X\times Y$, then the submanifolds $\Delta$, $\Delta$ are not transverse, and the inclusion of $\Delta$ into $X\times Y$ isn't transverse to $\Delta$.)
Another proof extending my comment, in case you are not fully glad with Paul's answer using another (equivalent) definition of intersection numbers via the index of vector fields. I hope that you can find the formal similarity in between mine and Paul's.
As the definition of intersection number requires us to perturb the submanifolds ($\Delta$ in this case) to achieve transversality, let me perturb each of them. That is, for $\Delta_X \subseteq X\times X$ we obtain $f_X:\Delta_X\to X\times X$ which is transverse to $\Delta_X$ and similarly $f_Y:\Delta_Y\to Y\times Y$ for $\Delta_Y$. Now, recall that $\Delta=\Delta_{X\times Y}=\Delta_X\times \Delta_Y$ (up to the canonical identification $X\times X\times Y\times Y\cong X\times Y\times X\times Y$, of course!). Again we need to consider a nice perturbation of the diagonal $\Delta$, but now we are in better situation: $f_X\times f_Y:\Delta_X\times \Delta_Y\to X\times Y\times X\times Y$ achieves the required transversality w.r.t. $\Delta$. Hence, from the definition of the intersection number $I(\Delta,\Delta),$
$\begin{align*} I(\Delta,\Delta)&=\sum_{(x,y,x,y)\in \Delta\cap f_X\times f_Y} \left(\mathrm{the\;sign\;of\;the\;intersection\;at\;}(x,y,x,y)\right)\\ &=\sum_{(x,y,x,y)\in \Delta\cap f_X\times f_Y} sgn_{X\times Y\times X\times Y}(x,y,x,y)\;\;\textrm{where }sgn\textrm{ means sign of blahblah from now on}\\ &=\sum_{(x,x)\in \Delta_X\cap f_X}\sum_{(y,y)\in \Delta_Y\cap f_Y} sgn_{X\times Y\times X\times Y}(x,y,x,y)\;\;\;\;\;\;\;\;\;\;\;\;\;\textrm{by the rule of product}\\ &=\sum_{(x,x)\in \Delta_X\cap f_X}\sum_{(y,y)\in \Delta_Y\cap f_Y} sgn_{X\times X}(x,x)sgn_{Y\times Y}(y,y)\;\;\;\;\;\;\;\;\textrm{ by the orientation convention}\\ &=I(\Delta_X,\Delta_X)I(\Delta_Y,\Delta_Y). \end{align*}$