Why must a country's balance of payments always be balanced in theory?
they're usually not - few countries manage a net zero in trade; over time it may vary, but, eg, the US has run a negative balance for decades. as long as the country's iis financially sound, short term differences don't matter that much. right now, the US should actually be spending even more, since the cost to borrow money is near zero
Because if too much money flows in, you get inflation and devaluation of the currency. If too much money flows out, you get deflation.
If you export far more than consumed, money comes in and domestic prices rise. If you import a lot, and money devalues, you cannot import more because you cannot afford to buy more.
One of the missing elements in the balance of payment theory is the flow of money. Many countries like the US that look like a major violation (lots of imports, not enough imports) is the flow of money and services. We take in a lot of investment and we train a lot of foreign students and receive money in return. That is an exchange of money for services, and not shown in the balance of trade equation.
Another missing element is remittances. Some nations import a lot and seem not to have the money for it. The money immigrants send home provides the funds for those nations' populations to consume the imports. Both the goods and the money to buy them are sent to that nation, but the balance of trade only shows disproportionate imports.
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