PWC ACADEMY

Economics ME 1
| CFA LEVEL

Economics
CFA LEVEL 1
 Economics | CFA LEVEL 1

Morning Session
Exam Weight: 8 – 12% / 14 – 22 Questions
Index

Learning Module Module Name

1 Topics in Demand and Supply Analysis

2 The Firm and Market Structures

3 Aggregate Output, Prices, and Economic Growth

4 Understanding Business Cycles

5 Monetary & Fiscal Policy

6 Introduction to Geopolitics

7 International Trade and Capital Flows

8 Currency Exchange Rates

Study Strategy
M-1 M-2 M-3 M-4 M-5 M-6 M-7 M-8
Step 1: Attend lectures.

Step 2: Review the notes.

Step 3: Solve CFAC EOC questions.

Step 4: Test Assessments from Wiley

Step 5: CFA online ecosystem

Study hard, no matter if it seems impossible, no matter if it takes time,

no matter if you have stay up all night, just remember that the feeling of
success is the best thing in the world.

1
💡
The Cournot solution falls between
competitive and monopoly equilibrium.
When the central bank or monetary authority chooses to target an
exchange rate, interest rates and conditions in the domestic
economy must adapt to accommodate this target and domestic
interest rates and money supply can become more volatile.
Central bank cannot control the amount of money that households
and businesses choose to save.
 Cooperating vs Non-cooperating Country

The strength of a country’s institutions is relevant to the

durability of its cooperative relationships.

A. National Security or Military Interests

B. Economic Interests

C. Geophysical Resource Endowment

D. Standardization

E. Cultural Considerations and “Soft Power”

exercise their influence to control resources. mutually beneficial trade

control key export markets. well integrated into the global supply chains
allows dominance and provide influence

‫اﻟﻬﻴﻤﻨﺔ‬ ‫اﻟﺘﻌﺪدﻳﺔ اﳉﺎﻧﺒﻴﺔ‬

political self-sufficiency ‫اﻻﻗﺘﺼﺎد اﳌﻐﻠﻖ‬ Cooperation between two countries, one

no external trade / finance. agreement at a time.
domestic industries are state owned.

control supply of goods, services,

‫اﻟﺜﻨﺎﺋﻴﺔ‬
Regionalism is an example where a group of
technology, and media.
countries within a region cooperate for their
benefit.
 Date driven milestones Sudden / Known risks that evolve
known in advance unanticipated risk over a period.
elections uprisings, invasions, Climate change,
natural disasters. cyber threats

High likelihood with low impact may not require massive attention
while low likelihood with high impact may merit scenario analysis
Probability of occurrence. Short term – volatility in Discrete impacts – Impact
but not regular monitoring.
Difficult to measure markets affecting entire only one company / sector
To assess risk and act in time, signposts – indicator,
Highly collabotive and industries. Ex: Exogenous / a time.
market level, data, or an event which warn of a risk
becoming more / less likely – are used; Green, Amber globalized countries are Black-swan events.
and Red. less likely to face this risk Broad impacts – Felt more
Medium term – Impair
holistically by a sector,
companies’ process, costs,
Help differentiate signal from noise. Requires trial and country, or global
error. and opportunities, lowering
economy.
valuations.
Long-term – important
Long ESG impacts.

High-velocity risks manifest into market volatility through prompt changes in asset prices
Low velocity risks have prolonged impacts.

Actively used or used as a warning. • Cooperative tools – Multilateral trade • Cooperative tools – Free exchange of
• Armed conflict is the most extreme form agreements, common markets, economic unions. currencies and foreign investments.
• Other tools are espionage, military • Non-cooperative tools – Nationalization, VERs, • Non-cooperative tools – Limiting access
alliances, NATO Domestic content requirements. to currency and preventing foreign
investment.

Cabotage – the right to transport people / resources

within a country by a foreign firm.
– Most countries don’t permit this

Geopolitical risk may cause movement of labor and

capital from one country to the other which results in
tilts of comparative advantages between countries
over time.
Example: Germany’s reaction to the Syrian refugee
crisis
The further away the world price of a good or service is from its autarkic (closed
economy) price in a given country, the more that country benefits from trade.
measures the flow of goods and services measures transfers of capital records investment flows

A current account deficit tends to result from low private savings, high private investment, a
government deficit or a combination of the three.
A current account surplus reflects high private savings, low private investment, or a government
surplus.
Deficit or surplus in the current account must be offset by an opposite balance in the sum of the capital
and financial accounts.
The balance of the current account is also important because it measures the size and direction of
international borrowing.
 Exchange rate between two currencies that is derived from each currency's relationship
with a third currency.

value of a
currency is changes in the relative
stated in terms purchasing power of one
of units of currency compared with
another another.
currency

The currency with the higher (lower) interest rate

will always trade at a discount (premium) in the
forward market.
Example: Assume that a trader is quoted a spot CAD/USD Example: Assume that a trader is quoted a spot CAD/USD exchange rate of
exchange rate of 1.0155 and 1 year forward premium of 0.30%. 1.0155 and 1 year forward points of 28. Calculate the forward exchange rate.

Calculate the forward exchange rate.

Profit is obtained by taking the

difference between the two
equation and is computed in
price currency and computed
profit is profit earned per 1 unit
of price currency.

Example: The USD/GBP spot rate is $1.3240/£. One-year spot rates are 3% in the US and 1% in the UK. Calculate the
1 year forward exchange rate and calculate the arbitrage profit if the forward rate is quoted in the market at
$1.37/£.
 ▪

To reduce its trade deficit and expects its

currency to depreciate is that its imports and
exports both be relatively elastic.

Example: Consider a country with an export elasticity of 0.70

and import elasticity of 0.60. The total trade value is 100 of
which exports contribute 60 and imports contribute 40. Using
the Marshall learner, explain what impact the currency
depreciation shall have on the trade balance of the country?