CFA Level I
Economics
Formula Reference Sheet
Elasticity Formulas
Own-Price Elasticity of Demand
%Δ Quantity%Δ Price
= Coefficient × (Original Price / Original Quantity)
Cross-Price Elasticity
%Δ Quantity%Δ Price (related good)
Positive = substitutes · Negative = complements
Income Elasticity
%Δ Quantity%Δ Income
Positive = normal good · Negative = inferior good
Currency % Change Relationship
1 + %Δ in one currency = 11 + %Δ change in another
Market Structure & Competition
Marginal Product
Δ OutputΔ Labor
N-Firm Concentration Ratio
Sum of market shares of N largest firms
HHI (Herfindahl-Hirschman Index)
Sum of squared market shares of N largest firms
Optimal Price in Monopoly (MR = MC)
MR = P(1 − 1Ep)
Ep = price elasticity of demand
Gross Domestic Product (GDP)
GDP — Expenditure Approach
GDP = C + I + G + (X − M)
C = consumption · I = investment · G = gov’t spending
X−M = net exports · Does NOT include taxes
X−M = net exports · Does NOT include taxes
GDP — Income Approach
GDP = National Income + Capital Consumption Allowance
Capital Consumption Allowance reflects depreciation of capital stock
Saving, Investment & Trade Identity
S = I + (G − T) + (X − M)
GDP Deflator
Nominal GDPReal GDP × 100
Price Indices
Price Index Comparison
| Index | Formula | Basket |
|---|---|---|
| Laspeyres | Σ(Q0 · P1) / Σ(Q0 · P0) × 100 | Base-period quantities |
| Paasche | Σ(Q1 · P1) / Σ(Q1 · P0) × 100 | Current-period quantities |
| Fisher | √(Laspeyres × Paasche) | Geometric mean of both |
Solow Growth Model
Growth in Potential GDP (Total Factor Productivity)
Growth in TechTotal Factor Productivity
+
WL × Growth in Laborweighted by labor share
+
WC × Growth in Capitalweighted by capital share
Sustainable Growth Rate
Labor Force Growth + Labor Productivity Growth
National & Personal Income
Personal Income
National Income
+ Transfer Payments
− Pretax Profit of Enterprises
− Indirect Business Taxes
= Personal Income
Personal Disposable Income
Personal Income − Personal Income Taxes
Current Account = X − M
Labour Market
Unemployment Rate
UnemployedLabor Force
Labor Force Participation Ratio
Labor ForceWorking-Age Population
Money & Banking
Money Creation (Money Multiplier)
Initial DepositReserve Requirement
Neutral Interest Rate
Trend Growth Rate + Inflation Target
Quantity Theory of Money (MV = PY)
M
Money Supply
×
V
Velocity of $ in circulation
=
P
Price Level
×
Y
Real Output
Balance of Payments
Balance of Payments Identity
Current Account = Capital Account + Financial Account
Current Account = X − M (trade balance)
Balance of Payments = Current Acc + Capital Acc + Financial Acc
Balance of Payments = Current Acc + Capital Acc + Financial Acc
Exchange Rates
No-Arbitrage Forward Exchange Rate
Forward
price / base
=
Spot
price / base
×
(1 + rprice)(1 + rbase)
interest rate ratio
Forward Points = Forward Rate − Spot Rate ·
Direct Quote = Domestic Currency / Foreign Currency
Real Exchange Rate
Nominal Exchange Rate (Spot) × CPI base currencyCPI price currency
Rate of Change
Final ValueInitial Value − 1
Marshall-Lerner Condition (Trade Balance Improves if…)
(Wx)(Ex) + (WM)(EM − 1) > 0
W = trade weight · E = price elasticity of exports/imports