CFA® Level I Economics Guide

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Overall Weighting of Economics on Level I, Relative Weighting/Importance by Segment

Economics has a 10% weighting on the CFA Level I examination. Although that is below the most heavily weighted topics (i.e., Ethics and Financial Reporting and Analysis with 15% each), Economics is weighted the same as or just slightly less than 5 of the 8 remaining subject matter areas.

The CFA Economics Curriculum consists of two Study Sessions (4 and 5), which contain seven Readings (12-18). However, segmenting the Readings more along the lines of standard economics course titles, the subject matter can be grouped into three categories:

  • Microeconomics (Readings 12 and 13)
  • Macroeconomics (Readings 14-16)
  • International economics (Readings 17 and 18)

As implied by the higher number of Readings, macroeconomics is generally believed to be slightly more heavily tested than the other categories.

The Subject Matter

The CFA Economics curriculum approaches the subject from the same perspective as college economics courses dealing with the topic. That is, the perspective is primarily one of economic theory rather than applied economics. Economics theory provides a framework or underpinning for many other modes of analysis (e.g., equity or derivative valuation, corporate finance). However, economics applied correctly to equity analysis, or bond valuation is covered in Equity Investments or Fixed Income, not in the Economics portion of the CFA curriculum.

Candidates that have taken at least two semesters (one on macro and one on micro) of college-level economics courses have likely been exposed to 80-90% of the issues covered by the CFA curriculum. However, the curriculum does go into specific topics in a bit more depth. CFA macroeconomics dives deeper in a few areas (e.g., schools of economic thought, price indexes, business cycles) than the typical college macroeconomics course. The curriculum also goes into more depth on currency markets, exchange rates, and the mathematics of the spot/forward exchange rate relationship than is encountered in the chapters on international economics in typical macroeconomics courses.

Candidates that took two or more college-level econ courses should find the CFA curriculum content mostly a refresher on the subject. Most of the areas cited above in which the curriculum goes into a given topic in a bit more depth should be readily understandable for Candidates who did reasonably well with their previous course work in economics. For the most part, the curriculum just investigates some topics in a bit more detail or slightly more depth than coverage on the same issues in college courses.

The big exception to the CFA curriculum’s similarity to college-level econ course content is the coverage of foreign exchange markets noted above. Issues such as spot and forward exchange rate quoting conventions, forward premiums/discounts, and real exchange rates are often tricky issues for those not already familiar with FX markets. As is true of the curriculum generally, Candidates are responsible for, and therefore should review the entirety of the Currency Exchange Rate Reading. However, there are no more than a few questions on these topics, so Candidates need to carefully weigh the trade-off between time spent mastering these issues versus the opportunity costs related study time devoted to more heavily tested issues.

Candidates with little or no previous college-level exposure to economics may find the going a bit tougher. Though issues related to Learning Outcome Statements (LOSs) are fully explained, the amount of supporting detail or number of examples used to illustrate those issues in many cases will be less extensive compared to that found in a college course textbook. Candidates in this situation may need to look to supplementary sources to augment what is written in the curriculum.

Online Resources Candidates Can Use to Prepare for Level I Economics

The CFA Institute publishes three “Prerequisite Economics Readings” which are available online:

  • Demand and Supply Analysis: Introduction
  • Demand and Supply Analysis: Consumer Demand
  • Demand and Supply Analysis: The Fir

(All can be accessed at CFA Institute’s Site)

There is a very significant overlap of the Prerequisite Economics Readings coverage with the content in the curriculum. The Prerequisite Economics Readings address some of the issues in more detail and/or use more examples relative to the curriculum. These Readings are intended to help Candidates without a solid foundation in economics to benefit from the higher amount of detail and number of examples.

Examples of Questions for Level I Economics:

  1. An economy is experiencing rising real GDP growth with an increase in the number of employed workers, but at the same time, its unemployment rate is rising. The most likely reason for the rise in the unemployment rate is:
    1. An increase in the birth rate.
    2. Discouraged workers are beginning to seek employment actively.
    3. Laid-off workers are taking part-time jobs while seeking full-time employment.

  2. A recessionary gap most likely results from which of the following?
    1. Rapid technological innovation
    2. Increasing raw materials prices
    3. Decreasing consumer confidence
  3. An economist has developed a demand function for estimating the weekly per household demand for rice (in kilograms): Qr=-2.6-0.12Pr+ 0.007I+ 0.15Pwf 

    Household surveys in the region have obtained the following data: average retail price of rice (Pr) of €1/kg, the average price of wheat flour (Pwf) of €0.80/kg, and regional weekly average household income (I) of €1,000. Relative to the price of wheat flour, the cross-price elasticity of demand for rice is closest to:
    1. -0.0218.
    2. +0.1364.
    3. +0.0273.

  4. After a 6% depreciation of the euro (EUR) versus the Japanese yen (JPY), the exchange rate between the currencies is JPY/EUR 120. Before EUR depreciation, the JPY/EUR exchange rate was closest to:
    1. 113.21
    2. 127.20
    3. 127.66

Fundamental Concepts Candidates Should Be Familiar with for Level I Economics


  • Supply and demand for individual firms and industries

  • Factors that effect, increase or decrease
  • Elasticity (degree of sensitivity) of supply and demand
    • Own-price elasticity
    • Cross price elasticity
    • Income elasticity
    • Income and substitution effect
    • Normal and inferior goods

  • Firm production/cost considerations

  • Diminishing marginal returns
  • Profit-maximizing output (marginal cost = marginal revenue)
  • Breakeven and shutdown level of production
  • Scale effects: economies and diseconomies of scale

  • Market structures: types, characteristics, demand curves

  • Competition (perfect and monopolistic), oligopoly and monopoly
  • Behavior patterns of competitors by market structure type
  • Factors affect long-run equilibrium for each market structure


  • Gross domestic product (GDP)
  • Definition/calculation (expenditure and income methods)
  • Identify and explain components for both methods
  • Real and nominal GDP and the GDP deflator

  • Aggregate supply and demand curves

  • Factors influencing shift in or movements along both curves
  • The interactions of aggregate supply and demand curves
  • Full employment (i.e., long-run) equilibrium GDP
  • Causes of short-run equilibria above/below the long-run equilibrium

  • Business cycles and economic indicators

  • Phases of the cycle and related business sector and economic effects
  • Employment/unemployment statistics
    • Labor force: definition and labor force participation rate
    • Types of unemployment: frictional and long term
    • Discouraged workers
  • Inflation statistics and effects
    • Types of inflation: cost-push and demand-pull
    • Accelerating, decelerating, hyper and deflation
    • Expected and unexpected and costs of each
    • Inflation indexes: Laspeyres, Fisher, and Paasche
    • Measures: consumer, wholesale/producer
  • Economic indicators: leading, lagging and coincident

  • Economic policy: types and tools
  • Monetary and fiscal policy tools
  • Expansionary and contractionary policies
  • Strengths and shortcomings of various system and tools
  • Money: definitions, functions and creation process
  • Central banks: roles, objectives and policy targets (e.g., inflation)

  • International Economics
  • International trade
    • Benefits and costs of international trade
    • Comparative versus absolute advantage
    • Models: Ricardian and Heckscher-Ohlin
    • Trade and capital restrictions
    • Trading blocs, common markets, economic unions, and free trade
    • Balance of payments (BOP)
    • Current account, capital account, and financial account

  • Foreign exchange

  • Exchange rates
    • Spot versus forward
    • Nominal versus real
    • Quoting conventions
  • Exchange rate relationship
    • Spot/forward spread reflects interest rate difference
    • Currency cross-rates
    • Foreign currency arbitrage
  • Foreign currency market functions and participants
  • Forward exchange rate premium/discount, in points or percentages
  • Exchange rate regimes
  • Exchange rate effects on international trade and capital flows

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