Can anyone give me intuitive explanation as to why the balance of payments accounts must balance?
The matter cannot be created nor destroyed, only transformed.
Why is continually running a current account deficit unsustainable in the long run?
What is the current account? The trade balance + transfers.
Commonly, the trade balance explains the 90-95% of the current account, so the question resides here. Note that transfers include many items like dividends to or from abroad, foreign aid, etc.
Why a deficit in current account is not sustainable in the long run? This means that we cannot have a deficit in the trade balance in the long run. Trade balance deficit means higher imports than exports, so why cannot we have higher imports than exports in the long run? The answer is pretty obvious at this level tho. To be able to sustain higher imports than exports in a certain period of time, we need to create a surplus in the capital and financial account, which is not also sustainable in the long run.
In short, a country can enhance its imports over exports in a certain period of time to revert the figure in the future and start exporting higher than before. This is similar as investing in a business to be able to gain a cash flow in the future. Can you invest and invest in the long run with no cash inflow? Sounds bad idea.
Countries that followed this strategy… Bratain,Japan, USA, Germany, France, etc.
Thanks