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186 PART 3 International Finance
sum of the current, capital, and financial accounts, with the sign reversed. In 2008
it was calculated as follows:
(1) (706,068 + 506,013)
‘The statistical discrepancy exists because our record of all of the transactions
in the balance of payments is incomplete. Although the errors could be in any of
the three accounts, it is believed that most of the errors are in the financial
account since it is the hardest one to measure accurately. Financial flows are
intangible, and in certain cases such as money laundering associated with the ille-
gal drug trade, the sending or receiving agents have incentives to hide them.
200,055
Types of Financial Flows
One of the primary concerns of most governments is the form of financial flows
entering and leaving their country. Some financial flows are very mobile and rep-
resent short-run tendencies. These flows are often vehicles for transmitting a
financial crisis from one country to another, or for generating sudden responses
to changes in investor expectations about the short-run prospects of an economy.
The degree of mobility of financial flows and the potential of some flows to
introduce a large element of volatility into an economy have turned the consid-
eration of the type of flows a country receives into a major issue.
Asa first approach to a more detailed representation of the financial account,
it is useful to subdivide the financial flows in Table 9.3 into categories that refer-
ence their origin in the public (governmental) or private sector. In most coun-
tries, the bulk of financial flows are private, although in times of crisis this can
change. Table 9.4 shows the 2008 financi) agsaya (mt Kui States divided
into five subcategories representing the main components of inflows and out-
flows in terms of public and private assets.
Official reserve assets arc mainly the currencies of the largest and most stable
economies in the world, such as US. dollars, EU euros, British pounds, and
Japanese yen. Reserve assets also include gold and special drawing rights (SDR),
the artificial currency of the International Monetary Fund (IMF). Reserve assets
are used to settle international debts and, consequently, central banks and trea-
sury ministries use them as a store of value. For example, when an importer in a
small country such as Chile purchases a shipload of goods from Europe, payment
may be in dollars or euros or pounds, but it is unlikely that the supplier would
accept Chilean pesos from the purchaser. The importer must convert some pesos
into a reserve currency, such as U.S. dollars, and use them to pay for its imports. If
the Chilean central bank is unable to provide dollars or another reserve currency
to Chilean banks and importers, then the import business grinds to a halt unless
the importer is able to secure some form of credit from the seller.
Since all forms of international debts are settled with reserve assets, especially
key currencies, they play a very prominent role in international finance. When they
become scarce in a country, it signals that potentially serious problems are arising.
For example, as discussed in Chapter 12, when Mexico’s economy collapsed in late
1994 and early 1995, it was because Mexicans owed dollars to various international