The CFA Economics topic focuses on economic theories and frameworks which provide a foundation for the various analyses found throughout the CFA curricula. Topics such as Equity Valuation or Fixed Income will apply the theories explored in Economics to their respective methods of analysis.
About 80-90% of the information covered by the CFA Economics curriculum is covered in typical macro and/or micro college-level introductory Economics courses. The novel 10-20% of the material will dive deeper into specific topics such as schools of economic thought, price indexes, business cycles, currency markets, exchange rates, etc. and also introduce new topics, such as foreign currency exchange.
Economics maintains a similar topic weighting through each level of the CFA exam cycle. Building a strong foundation in micro-and macro-economic principles will pay dividends as candidates advance through the CFA and encounter more complex financial concepts.
What is CFA Level 1 Economics?
CFA Level 1 Economics explores central micro-and macro-economic principles related to financial analysis and investment analysis. At 8-12%, Economics is less heavily weighted on the exam than Ethics and Financial Statement Analysis but is on par with most of the other topics.
Candidates will explore key factors in conducting economic forecasting, top-down investment analysis, and bottom-up security selection approaches.
The CFA Economics topic has a weighting of 8-12% of the exam, so that approximately 15-21 of the 180 CFA Level 1 exam questions focus on this topic.
|Topic Weight||No. of Readings||No. of Formulas||No. of Questions|
|8-12%||7||ca. 60||ca. 18|
Syllabus & Readings Overview
The 2022 CFA Level 1 Economics syllabus spans 7 readings and contains 79 LOS. It is divided into the following two study sessions:
|3||4||39||Covers supply and demand analysis for consumers and firms. Introduces the various market environments in which companies compete. Later readings discuss macroeconomic principles and the effect of the business cycle on economic activity.|
|4||3||40||Discusses how central banks and governments employ monetary and fiscal policy. Explores trade partnerships and global economics. Ends with material covering currency market fundamentals and foreign exchange.|
The CFA Level 1 exam includes 60 total readings for 2022. Seven readings (8-14) center on Economics (11.6% of the curriculum).
Demand and Supply Analysis
This reading focuses on fundamental microeconomic concepts. Microeconomic theory posits two private economic units: consumers and firms. Consumers are associated with consumption (demand) and firms meet that demand with goods and services (supply).
- The reading expounds on the principles of demand and supply, including how the market model influences transaction prices and quantities.
Firm and Market Structures
Market structures are intimately tied to how firms price their products and their potential profitability. For example, long-term profits are typically decreased in highly competitive markets but still attainable in less competitive markets. Familiarity with the effects of various market forces is a boon to financial analysts when evaluating a firm’s short- and long-term prospects.
- Candidates will learn to distinguish between various market structure classifications and how each structure influences the outcomes of demand and supply relations.
- The reading also covers the competition and interaction of companies in various market conditions, such as perfect competition, monopolistic competition, oligopoly, and pure monopoly.
Aggregate Output, Prices, and Economic Growth
Macroeconomics is the study of aggregate economic activity, typically applied to entire nations. This may be the sum of all business expenditures, total consumption, the overall level of interest rates, etc. Analysis of such variables is critical in the analysis of a nation’s aggregate output and income, labor productivity, inflation rates, competitive advantages, etc.
- The reading introduces such concepts as gross domestic product (GDP), aggregate demand and supply, and various sources of economic growth.
- Candidates will also learn to calculate GDP and compare it to national, personal, and disposable income.
Understanding Business Cycles
Typical business cycles and phases exist within economies despite their complexity. Understanding cycle phases aids the analyst in projecting how outcomes and decisions of both individuals and firms affect the performance of sectors and companies.
- Candidates will familiarize themselves with the business cycle and its phases and how various economic factors fluctuate accordingly.
- Furthermore, the reading elaborates on methods to interpret a set of economic indicators and covers measurements of inflations.
Monetary and Fiscal Policy
Governments in developed countries have an outsized impact on their economies due to the size of the workforce they employ and of their fiscal budgets. This influence is augmented by taxation and spending decisions (fiscal policy) and a central bank’s influence over credit and the quantity of money (monetary policy).
- This reading introduces how money is created, the role of central banks, and various theories regarding the demand for and supply of money.
- Candidates will learn to distinguish between expansionary and contractionary monetary policies and the advantages and disadvantages of various tools for implementing fiscal policies.
International Trade and Capital Flows
The attractiveness of a global investment may come down to a particular country’s economic robustness, its price stability or interest rates, or the strength of a specific sector or industry,or GDP growth rates, trade policies, demographics, human capital, etc.
- This reading explores the benefits of international trade and describes the dynamics of trading blocs, common markets, and economic unions.
- Candidates will study how international financial organizations influence and facilitate international trade and the implications of various trade and capital restrictions.
Currency Exchange Rates
The global economy is becoming increasingly interwoven and this integration is impossible without currency exchange. As a result, the foreign exchange market (FX) is the largest market on the planet. Furthermore, purely domestic portfolios are not exempt from the influences of globalization, making an understanding of foreign exchange critical for any financial analyst.
- Candidates will explore exchange rate mechanics and become familiar with major players.
- The reading also covers alternative exchange rate regimes and how exchange rates influence a country’s imports, exports, and capital flows.
Exam Weight and Topic Changes in CFA L1 Economics
CFA Level 1 Economics had a weight of 10% of the CFA exam content from 2018-2020. Since 2021 it has hovered between 8-12%. Reading-related updates for 2022 include:
- Understanding Business Cycles: A new LOS regarding credit cycles has been added.
- Aggregate Output, Prices, and Economic Growth: IS-LM model has been replaced.
CFA Economics Level 1 Sample Questions and Answers
The sample questions are typical of the probing multiple-choice questions on the L1 exam. During the exam, you have about 90 seconds to read and answer each question, carefully designed to test knowledge from the CFA Curriculum. UWorld’s question bank is built to expose you to exam-like questions and illustrate and explain the concepts tested thoroughly.
Study Tips for Level 1 Economics
- Integration over memorization: Economics is a social science. Therefore, candidates should avoid merely memorizing formulae and instead exercise logic and their understanding of economic principles by applying them to real-world questions (e.g., “Why is rent cheaper in Texas than in California?”)
- Understand graphs: With familiarity, candidates will gain the ability to intuit the story behind the graphs.
- Practice Questions: Moving through QBanks and taking mock exams is the best method to monitor your current understanding of the content.
Whether you have a finance or economics background, Economics is a central topic on all three levels of the CFA examinations that demands some attention to learn, notably the exchange rate segment!
Building a good foundation in CFA Level 1 Economics is critical to improving your prospects of passing CFA Levels 2 and 3, as it pervades all other topics.
- Be flexible with your expectations: there are a lot of things that need to be clarified and discussed. Once you’ve grasped the concepts, you’ll notice several recurring motifs in various situations.
- Aim to Understand the Logic: This is not a topic for memorizing.
- Study the Graphs: While graphs aren’t usually on the exam, their reasoning is. Consider the graphs as a visual representation of a real-world situation.
- Practice Applying Concepts in Different Situations with Practice Questions: This is a crucial stage in the learning process that must be completed at the end of each study session.
We now know that one of the most effective ways to prepare for the CFA tests is to practice. Always review the MCQs at the end of each chapter of the CFAI. UWorld’s all-digital learning platform is designed to assist students in passing the CFA exams by offering practice problems with detailed rationales for all answer alternatives, step-by-step problem-solving instructions, and realistic, professionally-produced graphics. Learn more about UWorld’s QBank.
It is critical to understand the steps involved in creating a formula, as this will aid in memorizing the formulas. When we understand the full explanation or method behind a math formula, it becomes much easier to remember since it makes more sense. UWorld’s SimpleSheets provide you with the formulas you need to pass the exam in a simple, intuitive layout right at your fingertips. Formulas are also pre-filled in our ReadyDeck flashcards that come included with all of our products. Check out our CFA L1 Formula sheet to download.
Economics is a central topic on all three levels of the CFA examinations that requires some effort to study, particularly the exchange rate segment, whether you have a finance or economics background.
Because it penetrates all other areas, a strong foundation in CFA Level 1-2 Economics is crucial to enhancing your chances of passing CFA Level 3.
- Expect a lot of topics to be explained and discussed, so be flexible with your expectations. You’ll notice several recurring motifs in various scenarios once you’ve comprehended the fundamentals.
- Attempt to comprehend the logic: this is not a topic to try and just memorize.
- Examine the Graphs: While graphs themselves aren’t frequently on the exam, the reasoning behind them is. Consider the graphs to be a graphic depiction of a real-life situation.
- Applying Concepts in a Variety of Situations with Practice Questions: This is an important step in the learning process that must be performed at the end of each study session.
The discrepancy between estimated GDP based on trends and actual GDP is known as the output gap. Inflation tends to rise as the gap decreases. The economy is under inflationary pressure if real GDP exceeds estimated GDP.