CFA Level 1 Economics: Our Cheat Sheet

Note: this cheat sheet is updated for the latest 2023’s curriculum.

Regardless whether you’ve a background in finance or economics, Economics is a central topic across all 3 levels of the CFA exams that requires some focus to master, especially the exchange rate section!

Building a strong foundation in CFA Level 1 Economics is essential in increasing your chances of passing CFA Level 2 and 3, as it permeates throughout other topics as well. That’s why we decided to create our Cheat Sheet series of articles, which focuses on one specific topic area for one specific CFA Level.

More Cheat Sheets will be published and continuously updated, sign up to our member’s list to be notified first.

By referring to the CFA curriculum’s Learning Outcome Statements (LOS), we prioritize and highlight the absolute key concepts and formula you need to know for each topic. With some tips at the end too!

Use the Cheat Sheets during your practice sessions to refresh your memory on important concepts.

Let’s dive in – this is a long article. Do breakdown your reading in chunks and come back to it often! 🙂

CFA Level 1 Economics: An Overview

cfa level 1 economics cheat sheet

Economics is a central topic in finance, with a similar topic weight across all 3 levels of the CFA exams.

However, the importance of Economics is not just restricted to the CFA exams. The topics covered, such as demand and supply analyses, FX, global trade and international economic policy, will underpin your comprehension of how the economic world works.

2023 CFA Level 1 Economics’ topic weighting is 8-12%, which means 14-22 questions of the 180 questions of CFA Level 1 exam is centered around this topic.

It is covered in Topic 2 with 8 Learning Modules (LMs).

The Economics topic area can be approximately split into two sub-types:

  • Microeconomics: economics on a smaller scale, such as focusing at one firm or one industry at a time. Useful for understanding how market forces will influence a particular business or industry
  • Macroeconomics: economics on a country-wide or global scale. Useful to see how government policies, decisions or world events influence the economy

CFA Level 1 Economics covers a lot of concepts that you may have repeatedly heard of, but may not fully understand yet, especially if you’re new to any kind of financial education.

Here’s a summary of the CFA Level 1 Economics chapter readings:

Learning ModulesSub-topicDescription
1Topics in Demand and Supply AnalysisThis reading focuses on microeconomics and covers how the demand and supply changes for a product or service influence each other.
2The Firm and Market StructuresHow companies interact and compete with each other in different market conditions: perfect competition, monopolistic competition, oligopoly, and pure monopoly.
3Aggregate Output, Prices and Economic GrowthAn introduction to macroeconomics concepts like gross domestic product (GDP), aggregate demand, aggregate supply and sources to economic growth.
4Understanding Business CyclesWalks through the theory of business cycles, unemployment and discusses the differences between inflation, deflation, hyperinflation and disinflation.
5Monetary and Fiscal PolicyExplains the various tools governments and central banks use, in an attempt to guide, control and optimize their own country’s economy through economic policy.
6Introduction to GeopoliticsExplains what geopolitics is, how it relates to globalization and how it impacts investments.
7International Trade and Capital FlowsAn introduction to international trade and capital flows, pros and cons of international trade and balance of payments.
8Currency Exchange RatesFocuses on the details of how exchange rates are quoted and calculated. Also walks through the effect of exchange rates on international trade and capital flows.

If biology is the study of how living things work, and physics is the study of how the physical world works, then economics is the study of how the world of business, goods and services work.

Understanding basic economics is key to a successful career in any field, business ventures and even your personal life given how it permeates through our everyday life.

LM1: Topics in Demand and Supply Analysis

sale shopping

Own-price elasticity of demand

\small E_{P_x}^d=\frac{\%\triangle Q_x^d}{\%\triangle P_x}
\small where \space Q_x^d \space is \space quantity \space demanded \space of \space good \space X, \\P_x \space is \space price \space per \space unit \space of \space good\space X

Note that own price elasticity of demand (PED) is usually negative:

  • If PED<1, demand is inelastic;
  • If PED=1, demand is unit elastic;
  • If PED>1, demand is elastic.
  • If PED=0, demand is perfectly inelastic, i.e. vertical demand curve.
  • If PED=∞, demand is perfectly elastic, i.e. horizontal demand curve.

Income elasticity of demand

E_i^d=\frac{\%\triangle Q_x^d}{\%\triangle I}, where \space I \space is \space income

Note that income elasticity of demand is positive for normal good, negative for inferior good.

Cross-price elasticity of demand

E_{P_y}^d=\frac{\%\triangle Q_x^d}{\%\triangle P_y}, where \space P_y \space is \space price \space per \space unit \space of \space another \space good \space Y

Note that cross-price elasticity of demand is positive for substitutes, negative for complements.

Income and substitution effects

When price of good X decreases:

Substitution effectIncome effectConsumption of good XGood X is a
PositivePositiveIncreasesNormal good
PositiveNegative (but smaller than substitution effect)IncreasesInferior good
PositiveNegative (and larger than substitution effect)DecreasesGiffen good

Veblen good on the other hand is a ‘status’ good, where demand increases when price increases. Both Veblen good and Giffen good have upward sloping demand curves, but for different reasons.

Breakeven and shutdown analysis in production

Profit maximization occurs when the difference betweeen Total Revenue (TR) and Total Cost (TC) is the greatest. The level of output where this occurs is when:

  • Marginal Cost (MC) = Marginal Revenue (MR), and
  • MC is rising

Breakeven occurs when:

  • TR=TC, and
  • price (average revenue) = average total cost (ATC)

At this breakeven level, economic profit is zero, although it may still earn a positive accounting profit (normal profit).

Production shutdown analysis in the short run & long run (TVC = total variable cost):

Revenue/cost relationshipShort run decisionLong run decision
TR = TCContinue operatingContinue operating
TC > TR > TVCContinue operatingExit market
TR < TVCExit marketExit market

LM2: The Firm and Market Structures

CharacteristicsPerfect competitionMonopolistic marketOligopolyMonopoly
Number of sellersMany firmsMany firmsFew firmsFew firms
Entry and exit barriersVery lowLowHighVery high
Product differentiationIdentical productsSubstitutes but differentiated (via advertising)Close substitutes or differentiated via features, quality, advertisingUnique products, no close substitutes
Pricing powerNone. Price-takerSomeSome to considerableConsiderable (price discrimination)
Other featuresEach firm faces a perfectly elastic demand curve (horizontal). All firms make normal profits in the long run.Each firm faces a downward sloping demand curve. All firms make normal profits in the long run.Each firm faces a downward sloping demand curve.

Price collusion is possible: kinked demand curve, Cournot assumptions, Nash equilibrium, Stackelberg model
Firm faces downward sloping industry demand curve. Can make economic profits in the long run if unregulated.

LM3: Aggregate Output, Prices and Economic Growth

CFA exam results date when will cfa results be released

Gross domestic product (GDP)

Expenditure approach:

GDP = C + I + G + (X – M)

Income approach:

GDP = Net domestic income + Consumption of fixed capital + Statistical discrepancy

Expenditure and income equality

(G – T) = (S – I) – (X – M)

where (G – T) = fiscal balance, (S – I) = savings less domestic investments, (X – M) = trade balance.

To finance a fiscal deficit (G – T > 0), the private sector must save more than it invests (S > I) and/or imports (M) should exceed exports (X), i.e. M – X > 0

Factors causing a shift in aggregate demand (AD)

To assess the change in AD, use the equation C + I + G + (X – M)

An increase inShifts the AD curveRationale
Stock pricesRightLeads to higher consumption (C)
House priceRightLeads to higher consumption (C)
Consumer confidenceRightLeads to higher consumption (C)
Business confidenceRightLeads to higher investment (I)
Capacity utilizationRightIf companies are operating at near or full capacity, this leads to higher investment (I)
Government spending (G)RightGovernment spending is a component of AD
Taxes (T)LeftLowers consumption (C) and investment (I)
Bank reservesRightIncreased money supply leads to lower interest rate, hence higher investment (I) and potentially consumer spending (C)
Exchange rates (foreign currency per domestic currency)LeftDomestic currency appreciation leads to less exports (X), more imports (I), i.e. a decrease in net exports, a component of AD.
Global economic growthRightHigher exports (X)

Factors causing a shift in aggregate supply (AS)

An increase inShifts short run ASShifts long run ASRationale
Supply of laborRightRightIncrease in resources
Supply of natural resourcesRightRightIncrease in resources
Supply of human capitalRightRightIncrease in resources
Supply of physical capitalRightRightIncrease in resources
Productivity and technologyRightRightImproves input efficiency
Nominal wagesLeftNo impactIncreases cost of production
Input prices (e.g. energy)LeftNo impactIncreases cost of production
Expectation of future pricesRightNo impactAnticipation of higher profitability in the future
Business taxesLeftNo impactIncreases cost of production
SubsidyRightNo impactReduces cost of production
Exchange rate (foreign currency per unit of domestic currency)RightNo impactReduces cost of production

Impact of (combined) changes in AD and AS

Change in ASChange in ADEffect on real GDPEffect on aggregate price level
IncreaseIncrease. Decreases unemploymentIncrease
DecreaseDecrease. Increases unemploymentDecrease
IncreaseIncrease. Decreases unemploymentDecrease
DecreaseDecrease. Increases unemploymentIncrease

LM4: Understanding Business Cycles

No Refunds for CFA Exam

4 phases of business cycles

  1. Trough: lowest point
  2. Expansion: comes after trough
  3. Peak: highest point
  4. Contraction (recession): comes after peak

Summary of business cycle theories

TheoriesBrief descriptionRecommended policies
Neo-classicalFree market, the ‘invisible hand’.Do nothing, let it be.
AustrianSimilar to neo-classical. It is government intervention that is causing fluctuations.Do nothing, let it be.
KeynesianAdvocates government intervention during a recession, as the economy doesn’t automatically correct itself in the short run. Focus on AD curve.Use fiscal and monetary policy as necessary to increase AD.
MonetaristMonetary policyMaintain steady money supply growth.
New classicalApplies microeconomic analysis to macroeconomics. Business cycles have real causes, no government intervention needed.Do nothing, let it be.

Types of unemployment

  • Frictional: temporary transitions, e.g. people who are between jobs.
  • Structural: caused by long run changes in the economy, e.g. demand for certain skills reduced whilst employers look for a different set of skillsets.
  • Cyclical: depends on the stage of business cycle which affects economic activity and hence employment.


  • Inflation = a sustained rise in overall prices in the economy
  • Deflation = a sustained decrease in aggregate price level, i.e. negative inflation rate or prices are falling.
  • Disinflation = declining inflation rate. Note that prices are still rising in disinflation, but at a slower rate than before.
  • Hyperinflation = an extremely high inflation rate. If over a 3 year period the aggregate price level doubles, this is a hyperinflation.
  • Cost-push inflation = inflation caused by a decrease in aggregate supply (AS)
  • Demand-pull inflation = inflation caused by an increase in aggregate demand (AD)
  • Laspeyres index: uses base consumption basket to measure inflation
  • Paasche index: uses current consumption basket to measure inflation
  • Fischer index: is the geometric mean of Laspeyres and Paasche index.

LM5: Monetary and Fiscal Policy

lots of money

Quantity theory of money

MV = PY, where M = quantity of money, V = velocity of money circulation, P = price level, Y = real output.

Fischer effect

Rnom = Rreal + πe

where Rnom= nominal interest rate, Rreal= real interest rate, πe= expected inflation rate

Monetary policy

Tools to implement monetary policy:

  1. Open market operations (OMO): Buy/sell government bonds, which leads to increase/decrease in commercial banks’ reserves, to increase/decrease money supply
  2. Central bank’s policy rate: If policy rate is high, amount of lending will decrease and quantity of money will also decrease. Vice versa.
  3. Reserve requirements: If reserve requirement is low, the money multiplier (reciprocal of reserve requirement) goes up and money supply increases. And vice versa.
Required \space reserves \space ratio = \frac{Required \space reserves}{Total \space deposits}
Money \space multiplier=\frac{1}{Reserves \space requirement}

Contractionary vs. expansionary monetary policy:

  • Contractionary monetary policy (reducing money supply and/or increasing interest rates) helps cool off an ‘overheating’ economy with high inflation due to high economic growth.
  • Expansionary monetary policy (increasing money supply and/or reducing interest rates) helps boost a slowing economy.

Limitations of monetary policy:

  • Central banks cannot control how much households save.
  • Central banks cannot control banks’ willingness to lend and hence expand credit.

Fiscal policy

Contractionary vs. expansionary fiscal policy:

  • Contractionary fiscal policy (reducing government spending and/or increasing taxes) helps control inflation in a high growth economy.
  • Expansionary fiscal policy (increasing government spending and/or reducing taxes) helps boost aggregate demand in a slowing economy.

Fiscal policy spending vs revenue tools:

Fiscal spending toolsFiscal revenue tools
Transfer payments: redistribution of wealth, e.g. via welfare payments, unemployment benefits etc.Direct taxes: Taxes on income (e.g. wealth, income, property, inheritance, capital gains, corporation profits etc)
Current government spending: spending on goods and services e.g. education, defence, healthcare etc.Indirect taxes: Taxes on goods and services (e.g. sales tax, excise duties)
Capital expenditure: Infrastructure spending e.g. roads, hospitals, schools etc.

Limitations to fiscal policy: recognition lag, action lag and impact lag.

Fiscal multiplier

Fiscal \space multiplier=\frac{1}{1-MPC(1-t)}

where MPC = marginal propensity to consume, t = taxes

LM6: Introduction to Geopolitics

Assessing geopolitical actors and risk

cfa geopolitics summary

There are generally 4 types of country behavior:

Seek self sufficiency, little or no external trade or financeCan be regional or global leadersTwo countries cooperating on political, financial, economic or cultural aspectsRule harmonization and engage in mutually beneficial trade agreements
State-owned strategic domestic industriesExercise political and/or economic dominance over others to control resourcesCountries that engage in bilateralism can still have one-at-a-time agreements with other nations.Allows a country to access resources and markets globally
Self sufficiency allows complete control over flow of product, services and technology.Hegemons may become more competitive if influence dwindles, increasing geopolitical riskRegionalism is somewhere in between bilateralism and multilateralism, whereby a group of countries work with one another whilst raising barriers to others outside the group.However, dependent on international cooperation for economic growth
E.g. China in 20th century, North KoreaE.g. USA, RussiaE.g. Japan (used to be, currently multilateral)E.g. Singapore

Tools of geopolitics:

  • National security tools: espionage, military
  • Economic tools: currency union, nationalization
  • Financial tools: currency markets, sanctions, capital controls

Incorporating geopolitical risk into the investment process

Types of geopolitical risk:

  • event risk
  • exogenous risk
  • thematic risk

Assessing geopolitical threats

To assess geopolitical risk, an investor should consider:

  • Likelihood of occurence
  • Speed of impact
  • Size and nature of impact

LM7: International Trade and Capital Flows

paying shop transaction

Comparative advantage vs. absolute advantage

  • Absolute advantage: occurs when a country can product a good with less resources or lower cost.
  • Comparative advantage: occurs when a country can product a good with lower opportunity cost than its trading partners.

Ricardian vs. Heckscher-Ohlin models of comparative advantage

Ricardian modelHeckscher-Ohlin (HO) model
Countries without absolute advantages can still benefit from trade from comparative advantages.Countries’ comparative advantages are based on relative scarcity of resources.
Labor is the only variable factor of production.Capital and labor are the variable factors of production.
Differences in technology is the key source of comparative advantage.HO model assumes the technology in each industry is the same for each country.

Differences in factor endowments is the key source of comparative advantage.

Regional trading blocs

Free trade area (FTA)No barriers to flow of goods and services amongst members
Customs union (CU)FTA + common trade policy amongst non-members
Common market (CM)CU + free movement of factors of production amongst members
Economic union (EU)CM + common economic institution and coordination of economic policies
Monetary union (MU)EU + common currency

Balance of payments (BOP) components

  • Current account (CA): measures the flow of goods and services, e.g. merchandise trade, services, income receipts, unilateral transfers.
  • Capital account (KA): measures transfer of capital, e.g. capital transfers, non-financial asset sales/purchases.
  • Financial account (FA): records investment flows, e.g. government-owned assets abroad, foreign-owned assets in the country

Current Account (CA) = X – M = Y – (C + I + G)

LM8: Currency Exchange Rates

finance data cashflow

Exchange rate convention in CFA curriculum

It’s important to know that the exchange rate notation in CFA curriculum is different, and opposite to the real world – don’t ask me why!

In the real world, EUR/GBP of 1.15 means EUR 1 = GBP 1.15.

However, in the CFA curriculum, EUR/GBP of 1.15 means EUR 1.15 per GBP 1. This is the opposite notation in the real world, so be mindful if you see real world exchange rate example questions.

It’s a key source of mistake for CFA candidates, and there are lots of foreign exchange questions throughout all 3 levels. Do make sure you get it right!

P.S. – For the purposes of the CFA curriculum, you should also be familiar with the convention of EUR:GBP = 1.15, which means GBP 1.15 = EUR 1, i.e. equals GBP/EUR = 1.15.

Exchange rate calculations

  • Nominal exchange rate is the quoted currency exchange rate at any point in time.
  • Real exchange rate adjusts the nominal exchange rate for inflation in each country compared to a base period.
Real \space exchange \space rate_{d/f}=Nominal \space exchange \space rate_{d/f} \times \frac{CPI_f}{CPI_d}

where d = domestic currency, f = foreign currency, CPI = consumer price index

  • Relationship between forward rates, spot rates and interest rates:
Forward \space exchange \space rate_{f/d}= Spot \space exchange \space rate_{f/d} \times \frac{1+r_f}{1+r_d}

where rd = risk-free rate of domestic currency, rf = risk-free rate of foreign currency

Exchange rate regimes

Types of exchange rate regimesDescription
Formal dollarizationDon’t have own currency. Adopts another country’s currency.
Monetary unionSeveral countries adopt the same currency, e.g. European Union.
Currency board systemCommitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate.
Fixed parity /
fixed peg
A country pegs its own currency with a foreign currency (or a basket of currencies) within a +/- 1% margin.
Target zoneSimilar to fixed parity, but with a wider margin (+/- 2%).
Crawling pegExchange rate is pegged but adjusted periodically.
Crawling bandsGradually increasing the margins of the fixed peg bands to transition from fixed peg to floating rate.
Managed floatMonetary authority intervenes to manage exchange rate without any specific target level.
Independently floatingMarket-driven exchange rate.

CFA Level 1 Economics Tips


​Economics students: don’t get cocky

To those of you who have taken economics courses in school, you may feel like you’ve done all this before.

Don’t be tempted to simply skip the whole thing. You may be surprised by how much you’ve forgotten, or concepts you’ve not previously fully understood that the CFA exam covers in more detail.

Get good guidance, and/or use examples

You may hear this a lot, but understanding (not memorizing) the core concepts behind this topic area is really important.

Economics is voluminous partly because there are numerous concepts to be explained, rather than, say, mathematical formulae to be memorized.

As it is very text-heavy, when studying Economics, you may find your mind ‘blanking out’, where you’re reading but not really comprehending. You need to break that cycle to quickly move on.

There are 3 good ways to speed up your comprehension:

  • A good instructor. Economics is one area where you can really benefit from having proper instruction. An hour of study and discussion with an instructor can advance your comprehension far better than days of self-studying. If Economics is really giving you trouble, do consider live classes, or a review seminar. You can see the latest CFA review courses here.
  • Lecture videos. If live classes are outside of your budget, you could also consider lecture videos. Although lacking interactivity with the instructor, videos can guide you through concepts step-by-step, peppered with informal examples and explanations that help seal your comprehension. Again, the latest options can be found in our Offers section.
  • Focus on examples. Learning Economics concepts can be a little bit like learning a new board game. Explaining a board game on paper can only get you so far – at some point it’s easier and more engaging to get going. Similarly, with Economics, it can be helpful to focus on the examples given and run through a few step-by-step. If you need more examples than the ones given in the study text, move to a few practice exams or get our Free L1 Practice Test.

Consider covering more ‘effort-efficient’ topics first

Economics has a lot of content for a topic area that’s 8-12% of the exam.

If you find that Economics is slowing your pace down, it might be more effort-efficient to focus on topic areas such as FRA, Fixed Income and Equity Investments. Check out our recommended CFA Level 1 best topic study order here.

Discuss, discuss, discuss


Discussions with your colleagues, friends and mentors (or in our Forum) can greatly help your understanding of Economics.

Whenever you have an opportunity, discuss relevant current events and the underlying economics, clarifying and asking questions where you can. Explain that you’re a CFA candidate if you have to!

Learned about exchange rates? Discuss how Brexit impacted the British Pound, and how that drop would influence the UK economy in various sectors. Speculate on options that the government can take to steady the economy.

In the process of this discussion, you’ll solidify your comprehension of your Economics material, and also increase your knowledge on current events. Win win!

More Cheat Sheet articles will be published and continuously updated. Get ahead of other CFA candidates by signing up to our member’s list to get notified.

Meanwhile, here are other related articles that may be of interest:


11 thoughts on “CFA Level 1 Economics: Our Cheat Sheet”

  1. Hello! Is there any way to receive all of these guides in one PDF? I would love to print them off before my test next week.

    • Hi Joe! Really sorry about this as we don’t produce these in PDF as we constantly update and improve them for the latest version. A suggestion is open the tab with these notes, and disconnect the internet to avoid distraction when studying.

  2. Hi, this is really helpful thanks. Using these in my last days of revision! I think there may be an error on the forward exchange rate. I think it is forward rate = spot rate x (1 + foreign (price) currency / 1 + domestic (base) currency). Whereas you have put the domestic currency as the numerator.

  3. Hi! First of all, a big thanks for all the much needed and useful content and support!
    I’m struggling with this sentence: ” If reserve requirement is low, the money multiplier (reciprocal of reserve requirement) goes up and money supply decreases.”, shouldn’t the money supply increase as the money multiplier goes up? Thanks again!!

    • Hi soleturnes, thank you for spotting my mistake, apologies for that!

      You are absolutely right that reserve requirement is low, the money supply increases, along with the money multiplier 🙂

  4. Thank you very much, Zee. I am just loving these cheat sheets. Looking forward to seeing cheat sheets for the rest of the L1 subjects. I have bookmarked them and review them every day before going to sleep. Thanks for your efforts!


Leave a Comment

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.