ABSTRACT
This chapter is concerned with analyzing the trade-theoretic consequences of foreign ownership of capital where the foreign country possesses absolute monopoly power in trade of capital.' The latter phenomenon is captured by assuming that the supply of foreign capital is completely inelastic — in other words it does not depend on the rate of retum.2 The quantity of capital supplied is determined on the basis of political considerations by the metropolitan country. In the case of colonial economies the metropolitan country also controls the political regime. The freedom to determine the quantity of capital brought into the host country provides the foreign owners with political and other leverage.
