Economics carries a 6-9% weight at CFA Level 1 — as detailed in our comprehensive guide to all 10 CFA Level 1 topics — and is one of the broadest sections in the curriculum. It spans microeconomics, macroeconomics, monetary and fiscal policy, international trade, and currency exchange rates. That’s a lot of ground to cover for a relatively modest weight.
The challenge with Economics isn’t depth — it’s breadth. Most of the individual concepts are not particularly difficult, but there are a lot of them. Candidates who try to master every detail end up spending disproportionate time on Economics relative to its weight. The smart approach is to be strategic about what you study deeply and what you study for conceptual understanding only.
What Economics Covers at Level 1
Microeconomics
This section deals with how individual markets work — supply and demand, firm behavior, and market structures.
Supply and demand: The foundational framework. You need to understand how shifts in supply and demand curves affect equilibrium price and quantity, and the factors that cause these shifts.
Elasticity: Price elasticity of demand, income elasticity, and cross-price elasticity. You need to know how to calculate each and interpret the results.
Market structures:
- Perfect competition (many firms, identical products, zero economic profit in long run)
- Monopolistic competition (many firms, differentiated products, zero economic profit in long run)
- Oligopoly (few firms, interdependent pricing, game theory concepts)
- Monopoly (one firm, price-making power, positive economic profit possible in long run)
Key exam focus: Understanding the characteristics that distinguish each market structure and the implications for pricing, output, and economic profit.
Macroeconomics
This section covers the economy as a whole — output, employment, inflation, and growth.
GDP and its components: GDP = C + I + G + (X - M)
You need to understand each component, the difference between nominal and real GDP, and the GDP deflator.
Business cycles: Expansion, peak, contraction, trough — and the economic indicators associated with each phase (unemployment, inflation, consumer confidence, industrial production).
Inflation: Types of inflation (demand-pull vs. cost-push), how it’s measured (CPI, PPI), and its economic effects. The relationship between inflation and unemployment (Phillips curve) is testable.
Unemployment: Types (frictional, structural, cyclical) and the concept of the natural rate of unemployment.
Monetary and Fiscal Policy
This is where economics becomes most relevant to financial markets.
Monetary policy:
- Central bank objectives (price stability, full employment, economic growth)
- Tools (open market operations, policy rates, reserve requirements)
- Transmission mechanisms (how rate changes affect the economy)
- Quantitative easing and unconventional monetary policy
Fiscal policy:
- Government spending and taxation as economic tools
- Expansionary vs. contractionary fiscal policy
- Fiscal multipliers
- Crowding out effect
Critical understanding: How monetary and fiscal policy decisions affect interest rates, inflation expectations, and financial markets. This is directly relevant to fixed income and equity valuation.
International Trade and Capital Flows
Why countries trade, what determines trade patterns, and how trade policies affect economies.
Key concepts:
- Comparative advantage (the foundation of trade theory)
- Trade barriers (tariffs, quotas, subsidies)
- Balance of payments (current account and capital account)
- Trade deficits and surpluses
Currency Exchange Rates
How currencies are priced and what drives exchange rate movements.
Key areas:
- Spot and forward exchange rates
- Cross rates and triangular arbitrage
- Interest rate parity (covered and uncovered)
- Purchasing power parity (absolute and relative)
- Factors affecting exchange rates in the long run and short run
Exam tip: Currency calculations can be tricky because of the bid-ask convention and the way exchange rates are quoted (direct vs. indirect). Practice these calculations carefully — errors in currency math often come from getting the quotation convention backwards.
Why Economics Has a Unique Study Challenge
Economics is the section where candidates most often fall into the trap of over-studying. Here’s why:
The breadth problem: There’s an enormous amount of content — micro, macro, policy, trade, currencies. If you try to study everything at university-course depth, you’ll spend 80+ hours on a 6-9% section. That’s poor time management.
The depth reality: Most Economics questions at Level 1 test conceptual understanding, not complex calculations. You rarely need to solve sophisticated problems. You need to understand relationships — if the central bank raises rates, what happens to bond prices? If a country has higher inflation than its trading partner, what happens to its currency?
The forgetting problem: Because Economics is broad and somewhat disconnected from the other CFA topics, candidates often study it early and forget it by exam day. Timing matters.
Study Strategy for Economics
Study Economics later in your preparation
I recommend tackling Economics in the second half of your study plan, after you’ve covered Quant, FRA, and the major finance subjects. This timing serves two purposes: the content is fresher on exam day, and you’ll have context from other subjects that makes economic concepts more relevant.
Focus on relationships, not details
The exam cares about cause-and-effect relationships far more than specific details. Build a mental framework of how key variables interact:
- Higher interest rates lead to lower bond prices, stronger currency, slower economic growth
- Higher inflation leads to higher nominal interest rates (Fisher effect)
- Expansionary fiscal policy increases government spending, may crowd out private investment
- A country with a current account deficit has a capital account surplus
Create a “relationship map” that links these variables together. This is far more useful than memorizing individual facts.
Prioritize monetary policy and exchange rates
These two areas are the most heavily tested within Economics and the most relevant to the broader CFA curriculum. Spend disproportionate time here:
- Understand how central banks influence the economy through interest rate changes
- Master the mechanics of covered and uncovered interest rate parity
- Practice cross-rate calculations and triangular arbitrage problems
- Know the purchasing power parity framework and its limitations
Spend less time on pure microeconomics
Market structure analysis and elasticity calculations, while conceptually important, tend to be lighter on the exam compared to macro and policy topics. Read these sections carefully once and do the practice problems, but don’t obsess over every detail.
Common Mistakes in Economics
Mistake 1: Confusing movements along a curve with shifts of the curve. A change in price causes movement along the demand curve. A change in income, preferences, or prices of related goods causes the demand curve to shift. This distinction is fundamental and gets tested regularly.
Mistake 2: Getting exchange rate directions backwards. If the quote is USD/EUR = 1.10, it means 1 euro costs 1.10 dollars. An increase in this rate means the euro is appreciating (getting more expensive in dollar terms). Currency direction errors are surprisingly common under exam pressure.
Mistake 3: Confusing nominal and real values. Real GDP adjusts for inflation; nominal GDP doesn’t. Real interest rate = Nominal rate - Inflation rate (approximately). The exam will test whether you know which version to use in different contexts.
Mistake 4: Oversimplifying fiscal policy effects. Expansionary fiscal policy doesn’t always stimulate the economy — it depends on the offsetting effects (crowding out, Ricardian equivalence). The exam tests nuanced understanding, not just directional predictions.
Mistake 5: Spending too much study time on Economics. This is a strategic mistake rather than a conceptual one. Given the 6-9% weight, anything beyond 35-40 hours of study represents diminishing returns that would be better spent on higher-weighted subjects.
Practical Exam Tips
Tip 1: For monetary policy questions, always think about the transmission mechanism — how does a central bank action affect short-term rates, then long-term rates, then asset prices, then the real economy? This chain of logic answers most policy questions.
Tip 2: For exchange rate questions, write down the quote convention before calculating. Is it direct or indirect? Base currency or price currency? Getting this right at the start prevents cascading errors.
Tip 3: Market structure questions are usually about identification — “given these characteristics, which market structure does this firm operate in?” Focus on the distinguishing features (number of firms, product differentiation, barriers to entry, pricing power).
Tip 4: Business cycle questions often pair with investment strategy implications. Know which asset classes tend to perform well in each phase of the cycle.
Time Allocation
Plan for 30-40 hours on Economics:
- Microeconomics (supply/demand, elasticity, market structures): 8-10 hours
- Macroeconomics (GDP, inflation, business cycles): 6-8 hours
- Monetary and fiscal policy: 6-8 hours
- International trade: 3-4 hours
- Currency exchange rates: 5-7 hours
- Practice problems: 5-7 hours
Final Thoughts
Economics at CFA Level 1 is a strategic subject — and as AI continues to reshape the finance industry, understanding macroeconomic frameworks remains a distinctly human analytical skill. It rewards breadth of understanding over depth of knowledge, and efficient time management over exhaustive study. The candidates who score well in Economics are typically those who focus on relationships and frameworks rather than trying to memorize every detail from the readings.
Study it later in your preparation, focus on the high-yield topics (monetary policy and exchange rates), and keep your total time investment proportional to the weight. Economics should support your overall score, not consume study time that higher-weighted subjects need.
If you want help building an efficient study plan that balances Economics with the rest of the curriculum, reach out for a free mentorship session. Smart time allocation is one of the biggest differentiators between candidates who pass and those who don’t.