CFA® Economics
The CFA Economics 2023 curriculum focuses on economic theories and frameworks which provide a foundation for the various analyses found throughout the CFA curricula. About 60-70% of the information covered by the CFA Economics curriculum is covered in typical macro and/or micro college-level introductory courses.
The novel 30-40% of the material covers a wide range of topics, including schools of economic thought, price indexes, business cycles, currency markets, exchange rates, and more. Economics maintains a similar topic exam weighting through each level of the CFA exam cycle. Building a strong foundation in micro- and macroeconomic principles will pay dividends as candidates advance through the CFA curriculum and encounter more complex financial concepts.
What to Expect in 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.
Exam Weighting
The CFA Economics topic has a weighting of 8-12% of the exam, so approximately 15-21 of the 180 CFA Level 1 exam questions focus on this topic.
| Topic Weight | No. of Learning Modules | No. of Formulas | No. of Questions |
|---|---|---|---|
| 8-12% | 8 | ca. 60 | ca. 18 |
Level 1 Economics 2023 Syllabus, Readings, and Changes
The 2023 CFA Level 1 Economics syllabus spans 8 learning modules and contains 83 LOS. The CFA Level 1 exam includes 73 total learning modules for 2023; eight on Economics (11% of the total curriculum). The only change in 2023 is the addition of a new learning module covering geopolitics.
While CFA Level 1 Economics had a weight of 10% of the CFA exam content from 2018-2020, it has maintained a weight of 8-12% for 2022-2023.
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 |
|---|---|---|---|---|---|
| 10% | 10% | 10% | 8-12% | 8-12% | 8-12% |
Reading-related updates for 2023 include:
- Introduction to Geopolitics: A new learning module introducing geopolitics and explaining its importance for investment management.
Topics in 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.
The 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.
Introduction to Geopolitics
Geopolitics is closely related to globalization, as the interconnectedness of the world’s economies and political systems has increased in recent decades. This has led to both cooperation and competition between countries as they seek to advance their own interests in an increasingly interconnected world.
- The reading analyzes geopolitics from the perspective of cooperation versus competition
- Candidates will learn how to assess geopolitics and its relationship with globalization
- Explores tools of geopolitics and their impact on regions and economies
- Analyses geopolitical risk and its impact on investments
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.
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.
In the short run, a company maximizing profit in a market with perfect competition produces at a quantity that most likely results in:
- economic profits equal to zero.
- marginal revenue equal to marginal cost.
- market price greater than marginal revenue.
A demand curve for money is depicted in the graph below:
Which of the following best explains the shape of the curve between M 0 and M 1?
- Liquidity trap
- Policy rate of zero
- Neutral rate of interest
A currency trader observes the following currency spot exchange rates from two dealers:
| Source | Currency | Exchange Rate |
|---|---|---|
| Dealer 1 | CNY/THB | 0.22 |
| Dealer 1 | INR/THB | 2.35 |
| Dealer 2 | INR/CNY | 10.75 |
Based on only this information, the arbitrage profit available per every CNY 1 is closest to:
- INR 0.0682
- INR 0.0064
- CNY 0.0682
What to Expect in CFA Level 2 Economics?
At 5-10% of the total exam content, CFA Level 2 Economics is less heavily weighted than about half of the topics on the Level 2 exam and contains only one study session.
The topic readings focus on foreign exchange concepts and theories of exchange rate determination. Candidates will explore three theories of growth and how regulation affects particular industries.
Exam Weighting
The CFA Economics topic has a weighting of 5-10% of the exam content, meaning that approximately 4 – 8 item set questions or 1 – 2 item sets focus on this topic.
| Topic Weight | No. of Learning Modules | No. of Formulas | No. of Questions |
|---|---|---|---|
| 5-10% | 3 | ca. 50 | 4-8 questions; 1-2 item sets |
Level 2 Economics 2023 Syllabus, Readings, and Changes
The CFA Level 2 Economics syllabus spans 3 Learning Modules and contains 34 LOS. The L2 exam includes 49 learning modules for 2023; three focus on Economics (6% of the total curriculum).
| No. of Learning Modules – 3 | No. of LOS – 34 | |
|---|---|---|
|
Summary Introduces fundamental foreign exchange concepts and theories of exchange rate determination. Discusses three theories of growth and concludes with an overview of the regulation and its effect on industries. |
||
While the exam weight of the Economics section has remained at a consistent 5-10% since 2018, it has stayed at 5-10% till 2023.
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 |
|---|---|---|---|---|---|
| 5-10% | 5-10% | 5-10% | 5-10% | 5-10% | 5-10% |
Reading-related updates for 2023 include:
- Updated the Understanding Equilibrium Value reading under Currency Exchange Rates
- The Economic Growth reading has been revised
Currency Exchange Rates: Understanding Equilibrium Value
Exchange rate fluctuations are known to be unpredictable. Therefore, financial analysts are better off understanding long-run equilibrium value, risk exposure, and currency hedges.
- Candidates will learn about fundamental theories and important influences regarding currency equilibrium dynamics.
- The reading explores international parity conditions and how to calculate important variables related to long-term currency value.
Economic Growth
Global investors are concerned with forecasts of long-term economic growth. Investors must become familiar with identifiers of long-term sustainable growth in order to develop global portfolio strategies.
- Candidates will explore factors that drive long-term growth and that may be predictive of success or failure.
- The reading discusses the possibility of developing countries catching up with developed countries in the long-run and how policies affect sustainable growth rates.
Economics of Regulation
Regulations are developed and implemented when market solutions can’t adequately address an issue. These regulations influence national economies, companies, and individuals.
- The reading discusses the reasoning behind regulation, its role in the fairness of markets, and its costs and benefits.
- Candidates will also learn about the tools regulators use domestically and internationally.
CFA Economics Level 2 Sample Questions and Answers
The sample questions here are typical of the L2 exam’s complexity and depth: formatted as item sets, with a vignette to deliver a scenario that tests the CFA L2 Curriculum. (On the actual exam, each vignette applies to four questions; we’ve thrown in a couple extra to get a bit more learning in). And be sure to review the illustrated explanations we’ve provided for each question: UWorld’s question bank is designed to expose you to exam-like questions and explain the concepts tested thoroughly.
Passage
Botan Saito is a portfolio manager for Spire Financial. Spire’s investments are largely domestic, and Saito plans to diversify Spire’s holdings by adding investments in international markets. Saito identifies three countries that he will research further. He collects the following economic data for each country, using average year-on-year growth rates:| Exhibit 1 Select Economic Data. 20X4 | |||
|---|---|---|---|
| Country 1 | Country 2 | Country 3 | |
| Total physical capital ($ billions) | 2,000 | 300 | 4,500 |
| Year-on-year (YoY) growth | 1.7% | 2.9% | 2.0% |
| Labor force (millions) | 16 | 9 | 45 |
| YoY growth | 0.5% | 3.4% | 0.8% |
| Total hours worked (millions) | 30,000 | 16,000 | 78,000 |
| YoY growth | 1.2% | 3.6% | 0.6% |
| GDP ($ billions) | 1,600 | 150 | 4,050 |
| YoY growth | 3.5% | 6.2% | 2.8% |
| Steady state GDP growth (YoY) | 3.2% | 4.1% | 2.5% |
| Total factor productivity growth (YoY) | 2.0% | 0.7% | 1.6% |
| Share of output paid to capital | 65% | 85% | 70% |
| Exhibit 2 Country-related Institutional Factors | |
|---|---|
| Country 1 |
|
| Country 2 |
|
| Country 3 |
|
- GDP growth is slightly above the country’s steady-state GDP growth rate in 20X4;
- earnings-to-GDP ratio was above the country’s historical average in 20X4; and
- price-to-earnings ratio of the country’s publicly traded stocks was below its historical average in 20X4.
| Conclusion 1 | Actual GDP growth relative to a country’s potential GDP growth rate is an important factor in central bank decision-making and the likelihood of changes to the central bank’s policies. |
| Conclusion 2 | A decrease in a country’s potential GDP growth rate increases the likelihood that the credit its sovereign debt will be downgraded. |
Saito wishes to identify how capital deepening will affect each country’s per capita output growth. Based on the neoclassical model, which of the following factors is most appropriate for Saito to consider?
- Capital-to-labor ratio
- Steady-state GDP growth
- Average hours worked per worker
Based on Exhibit 1 and the two-factor production function, Country 1’s potential GDP is closest to:
- 2.9%
- 3.5%
- 4.9%
Based on Exhibits 1 and 2, all else equal, which country will most likely realize the greatest percentage increase in potential GDP from investments in health care?
- Country 1
- Country 2
- Country 3
What to Expect in CFA Level 3 Economics?
CFA Level 3 Economics. At 5-10% of the exam content, Economics is among the three least heavily weighted topics. The topic readings cover the process of setting capital market expectations for specific asset classes and cases demonstrating the uses of macroeconomic analysis. Furthermore, candidates will learn about important tools for conducting economic analysis.
Exam Weighting
The CFA Economics topic has a weighting of 5-10% of the total exam content. The Level 3 CFA exam contains 4-8 essay questions and 1-2 item sets that pertain to Economics.
| Topic Weight | No. of Readings | No. of Questions |
|---|---|---|
| 5-10% | 2 | 1-2 item sets and 4-8 essay questions |
Level 3 Economics Syllabus, Readings, and Changes
The CFA Level 3 Economics syllabus spans 2 readings and contains 18 LOS. It contains only 3 study sessions:
| Study Session | No. of Readings | No. of LOS |
|---|---|---|
| 3 | 2 | 18 |
|
Summary Examines setting capital market expectations and major tools of economic analysis. Covers the use of macroeconomic analysis in setting those expectations. |
||
The CFA Level 3 exam curriculum includes 35 total readings for 2023. The weight of the Economics section has remained at a consistent 5-10% since 2018.
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 |
|---|---|---|---|---|---|
| 5-10% | 5-10% | 5-10% | 5-10% | 5-10% | 5-10% |
Due to the transition and changes in CFA Level 3 exam windows, CFA Institute has decided to freeze changes in CFA Level 3. This means that the 2023 CFA Level 3 curriculum will remain the same as that of 2022.
Framework and Macro Considerations
Capital market expectations are an essential input to formulating a strategic asset allocation. This reading focuses on the use of macroeconomic analysis in setting expectations. The second of two readings on capital market expectations builds on this foundation to address setting expectations for specific asset classes: equities, fixed income, real estate, and currencies.
Capital market expectations (CME) are expectations about the risk and returns of asset classes, however broadly or narrowly defined by the investor. Capital market expectations are an important factor in strategic asset allocation.
Short- and long-term expectations may influence the investor’s decision. Insights into capital markets should also aid in security selection and asset valuation.
- The reading provides a general framework for forming capital market expectations and warns readers about the variety of challenges and dangers that await investors and analysts in this field.
- The second of the two CME readings builds on this basis to discuss setting expectations for individual asset class risk and return. Throughout both readings, several analytical tools are examined that can be used to forecast asset class returns.
Study Tips for CFA Economics
-
Avoid memorizing formulae and instead, bank on logic
Candidates preparing for Economics should avoid merely memorizing formulae and instead understand the theories and logic of economic principles. As you are learning, try to apply your knowledge to real-world questions (e.g., “Why is rent cheaper in Texas than in California?”) as well as to your study materials.
-
Increase your familiarity with graphs
Successful candidates will gain the ability to intuit the story behind the graphs. While graphs themselves aren't frequently seen on the exam, the scenarios that they illustrate are. Consider the graphs to be a graphic depiction of a real-life situation.
-
QBanks and taking mock exams
Practicing QBanks is the best method to monitor your current understanding of the content. Use them to find where your weak spots are and then bear down on those areas of the curriculum. And then, repeat.
-
Embrace the theory
Growth, government regulation, commerce, GDP, and balance of payments could all require some simple mathematical calculations, but it's critical to understand the theories and rationales as well.
-
Put special effort into learning currency exchange
Currency exchange is often less intuitive and, therefore, more difficult for candidates to grasp. Plan to put effort into learning the applications demonstrated, such as the carry trade and no-arbitrage exchange rates. An understanding of currencies is a necessity for investment analysts and portfolio managers.
For more information, visit our CFA Level 1 Study Guide and Level 2 Study Guide
Frequently Asked Questions
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.
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.
While the first two levels revolved around basic financial knowledge, investment valuation, and the application of both, the CFA Level III exam focuses on portfolio management and wealth planning. The CFA Level 3 difficulty is comparable to a Master’s degree by most comparisons. The Economics portion of Level 3 is part of the Portfolio Management section and builds on the content from L1 and L2.
