The Cheat Sheet articles are a series of articles, each focusing on one specific topic area of the CFA exam for one specific CFA level. In each Cheat Sheet article, we will cover the basics of what you need to know before diving into the material – what it’s about in a nutshell, how significant it is in the CFA exams, real-life applications, and tips for the CFA exams. You should aim to read each relevant Cheat Sheet article before you start studying the topic area to give you a flying start.
For this article, we will look at Economics for CFA Level I, the basis of not just the CFA exams, but your understanding of how the business and financial world works.
Apart from those of you who have specialised financial roles, the knowledge you pick up from the Economics topic could be the most important and useful topic area beyond the CFA exams. The concepts you pick up here will serve you well after you’ve passed Level III.
- 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 I 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. These include:
- how demand and supply changes for a product or service influence each other
- how companies interact and compete with each other in different market conditions
- macroeconomic concepts like GDP
- how the world trades with each other
- how currency exchange differences influence economic activity
- how governments attempt to guide, control and optimise their own country’s economy through economic policy
A good understanding of Economics helps you make informed decisions not just in finance, but in a multitude of fields, and your personal life. For example, a business owner would need to understand concepts like supply, demand, pricing and financing to run an effective business. Understanding changes in lending rates during a recession, and property supply & demand in your area can inform your decision on whether it is a good idea to purchase a family home at a particular time.
Economics affect our everyday life whether we want it to or not. So understanding economics is a key part to making the most out of your life.
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 memorising) 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 memorised. 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 three 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 review courses available in our Store.
- 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 Store.
- 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.
Consider covering more ‘effort-efficient’ topics first
Economics has a lot of content for a topic area that’s 10% 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. You can learn more about topic area order by reading our guide on Level I topic areas here.
Discussions with your colleagues, friends and mentors 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!
Economics questions are mostly qualitative (although some calculation-based questions do appear). These can include ‘correct statement’ questions such as the following from our Free L1 Practice Test:
Which of the following statements is/are most likely correct?
I: The demand for a country’s currency is a downward-sloping function of its exchange rate.
II: Purchasing power parity refers to the relation between interest rates for two currencies and changes in their exchange rates.
III: Interest rate parity refers to the relation between countries’ inflation rates and exchange rates of their currencies.
A. All statements are correct
B. Only statement I is correct
C. Both statements II and III are correct
Quantitative questions can also sometimes surface. These usually focus on your understanding of concepts to guide some simple calculations, rather than your mathematical prowess.
If a 5% increase in income leads to a 12% increase in the quantity demanded of mobile phones, ceteris paribus, the value of the income elasticity of demand for mobile phones is:
A. 2.4 and mobile phones are a normal good
B. 0.42 and mobile phones are a normal good
C. 2.4 and mobile phones are an inferior good
Hope this Cheat Sheet has got you fired up and ready to get going on Economics – if you run into any problems just give us a shout in the comments box below!
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