Economics • Formulas CFA® Level 1

Economics • Formulas CFA® Level 1

Need an all-in-one list with the Economics formulas included in the CFA® Level 1 Exam? We have compiled them for you here. The relevant formulas have been organized and presented by chapter. In this section, we will cover the following topics — Demand and Supply Analysis, Firm and Market Structures, Aggregate Output, Prices, and Economic Growth, Business Cycles, Monetary and Fiscal Policy, International Trade, Capital Flows, and Currency Exchange Rates.


1. Topics in Demand and Supply Analysis


Price Elasticity

Price~elasticity = \frac {\%\Delta~Quantity~demanded~(Qx)}{\%\Delta~Price~(Px)}

0 > e > -1 \rightarrow inelastic demand
-1 > e > -∞ \rightarrow elastic demand
e = -1 \rightarrow unit elastic demand
e = 0 \rightarrow perfectly inelastic demand
e = -∞ \rightarrow perfectly elastic demand

Income Elasticity

Income~elasticity = \frac {\%\Delta~Quantity~demanded~(Qx)}{\%\Delta~Income~(Ix)}

e > 0 \rightarrow normal goods
e < 0 \rightarrow inferior goods
ε{_Y} = Income elasticity

Cross-price Elasticity

Cross-price~elasticity = \frac {\%\Delta~Quantity~demanded~(Qx)}{\%\Delta~Price~of~a~related~good~(Py)}

e > 0 \rightarrow the related product is a substitute
e < 0 \rightarrow the related product is a complement
y = Related product
ε{_{py}} = Cross-price elasticity


2. The Firm and Market Structures


For all market structures, Max Profit \longrightarrow when MC = MR

MC = Marginal cost
MR = Marginal revenue

Breakeven points:
AR = ATC (perfect competition)
TR = TC (imperfect competition)

ATC = Average Total Cost
AR = Average Revenue
TR = Total Revenue
TC = Total Cost
AR = ATC holds true in imperfect competition

Short-run shutdown points:
AR < AVC (perfect competition)
TR < TVC (imperfect competition)

Market structures:
Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly


3. Aggregate Output, Prices, and Economic Growth


Total GDP = final value of goods and services produced (market value)
+ government services (at cost)
+ rental value of owner-occupied housing (an estimate)

GDP~Deflator =  \frac{Nominal~GDP}{Real~GDP} \times 100
Nominal~GDP{_t} = P{_t} \times Q{_t}
Real~GDP{_t} = P{_{b}} \times Q{_t}

t = Current year
b = Base year
P{_t} = Prices in year {_t}
P{_b} = Prices in base year
Q{_t} = Quantity produced in year {_t}

Expenditure Approach

Real~GDP = Consumption~spending~(C) + Investment~(I) + Government~spending~(G) + Net~exports~(X-M)

X = Exports
M = Imports

Income Approach

Real~GDP = National~income + Capital~consumption~allowance + Statistical~discrepancy
Real~GDP = Consumption~spending~(C) + Savings~(S) + Taxes~(T)
Savings~(S) = Investments~(I) + Fiscal~Balance~(G-T) + Trade~Balance~(X-M)
S – I = Fiscal~Balance~(G-T) + Trade~Balance~(X-M)

National Income = Employees’ compensation
+ Corporate and government profits before taxes
+ Interest income
+ Unincorporated business net income (business owners’ incomes)
+ Rent
+ Indirect business taxes
− Subsidies

Personal Income = National income
+ Transfer payments (social insurance, unemployment or disability payments)
− Indirect business taxes
− Corporate income taxes
− Undistributed corporate profits

Personal Disposable Income = Personal income – Personal taxes

Potential GDP = Aggregate hours worked × Labor productivity
\longrightarrow Aggregate hours worked = Labor force × Average hours worked per week
\longrightarrow Growth in Potential GDP = Growth in labor force + Growth in labor productivity

The Production Function

Y = A \times f (K, L)

Y = Aggregate output
A = Total Factor Productivity (TFP)
K = Capital
L = Labor

Growth in Potential GDP = Growth in technology + WL × (growth in labor) + WC × (growth in capital)
WL = Labor’s percentage share of national income
WC = Capital’s percentage share of national income


3. Understanding Business Cycles


Unemployment~Rate = \frac {Number~of~unemployed~people}{Total~labor~force}
Participation~Rate~(Activity~Ratio) = \frac {Total~labor~force}{Total~working–age~population}
Labor~Force = Unemployed~people + Employed~people

Unemployed = Looking for job

Consumer~Price~Index = \frac {Cost~of~basket~at~current–year~prices}{Cost~of~basket~at~base–year~prices} \times 100
Laspeyres’ Index = \frac {\Sigma~(Current–year~price \times Base–year~quantity)}{\Sigma~(Base–year~price \times Base–year~quantity)}
Fisher’s~Index = \sqrt {(Laspeyres’~Index) \times (Paashe~Price~Index)}
Paashe~Price~Index = \frac {\Sigma~(Current–year~price \times Current–year~quantity)}{\Sigma~(Base–year~price \times Base–year~quantity)}

4. Monetary and Fiscal Policy


Money~Multiplier = \frac {1}{Reserve~requirement}
Fiscal~Multiplier = \frac {1}{1- MPC \times (1- t)}

MPC = Marginal propensity to consume
t = Tax rate

Equation of Exchange

MV = PY~(Money~supply \times Velocity = Price \times Real~output)

Fisher Effect

Nominal~Interest~Rate = Real~interest~rate + Expected~inflation~rate

Neutral Interest Rate

Neutral~interest~rate = Real~trend~rate~of~economic~growth + inflation~target

5. International Trade and Capital Flows


GDP

GDP = C + I + G + X - M

C = Consumption
I = Investments
G = Government Spending
X = Export
M = Import

Balance of Payments

Current~Account + Capital~Account + Financial~ Account = 0

Trade Balance

X - M = Private~Savings + Government~Savings - Investments~in~domestic~capital

6. Currency Exchange Rates


Real~Exchange~Rate = Nominal~exchange~rate \times \frac {CPI~base~currency}{CPI~price~currency}

Follow the links to find more formulas on Quantitative Methods, Corporate Finance, Alternative Investments, Financial Reporting and Analysis, Portfolio Management, Equity Investments, Fixed-Income Investments, and Derivatives, included in the CFA® Level 1 Exam.

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