ECONOMICS AND FINANCIAL STATEMENT ANALYSIS CFAđ Program Curriculum 2022 ã LEVEL I • VOLUME CONTENTS How to Use the CFA Program Curriculum Background on the CBOK Organization of the Curriculum Features of the Curriculum Designing Your Personal Study Program CFA Institute Learning Ecosystem (LES) Prep Providers Feedback ix ix x x xi xii xiii xiv Economics Study Session Economics (1) Reading Topics in Demand and Supply Analysis Introduction Demand Concepts Demand Concepts Price Elasticity of Demand Extremes of Price Elasticity Predicting Demand Elasticity, Price Elasticity and Total Expenditure Elasticity and Total Expenditure Income Elasticity of Demand, Cross-Price Elasticity of Demand Cross-Price Elasticity of Demand Substitution and Income Effects; Normal Goods, Inferior Goods and Special Cases Normal and Inferior Goods Supply Analysis: Cost, Marginal Return, and Productivity Marginal Returns and Productivity Economc Profit Versus Accounting Profit Economic Cost vs Accounting Cost Marginal Revenue, Marginal Cost and Profit Maximization; Short-Run Cost Curves: Total, Variable, Fixed, and Marginal Costs Understanding the Interaction between Total, Variable, Fixed, and Marginal Cost and Output Perfect and Imperfect Competition, Profit Maximization Profit-Maximization, Breakeven, and Shutdown Points of Production Breakeven Analysis and Shutdown Decision The Shutdown Decision Economies and Diseconomies of Scale with Short-Run and Long-Run Cost Analysis Short- and Long-Run Cost Curves Defining Economies of Scale and Diseconomies of Scale Summary Practice Problems Solutions indicates an optional segment 5 6 11 12 13 14 15 18 19 23 23 28 28 29 31 35 36 38 39 43 43 44 48 51 58 ii Reading Reading 10 Contents The Firm and Market Structures Introduction & Analysis of Market Structures Analysis of Market Structures Perfect Competition & Demand Analysis in Perfectly Competitive Markets Demand Analysis in Perfectly Competitive Markets Elasticity of Demand Other Factors Affecting Demand Consumer Surplus: Value Minus Expenditure Supply Analysis & Optimal Price and Optimal Output In Perfectly Competitive Markets Optimal Price and Output in Perfectly Competitive Markets Factors Affecting Long-Run Equilibrium in Perfectly Competitive Markets Supply, Demand, Optimal Pricing, and Optimal Ouput under Monopolistic Competition Demand Analysis in Monopolistically Competitive Markets Supply Analysis in Monopolistically Competitive Markets Optimal Price and Output in Monopolistically Competitive Markets Long-Run Equilibrium for Monopolistically Competitive Firm Oligopoly & Demand Analysis and Pricing Strategies in Oligopoly Markets: Pricing Independence Portion Demand Analysis and Pricing Strategies in Oligopoly Markets Oligopoly & Demand Analysis and Pricing Strategies in Oligopoly Markets: The Cournot Assumption Part Oligopoly & Demand Analysis and Pricing Strategies in Oligopoly Markets: The Nash Equilibrium part Supply Analysis & Optimal Price and Output & Long-Run Equilibrium in Oligopoly Markets Optimal Price and Output in Oligopoly Markets Factors Affecting Long-Run Equilibrium in Oligopoly Markets Monopoly & Demand & Supply & Optimal Price and Output in Monopoly Markets Demand Analysis in Monopoly Markets Supply Analysis in Monopoly Markets Optimal Price and Output in Monopoly Markets Price Discrimination and Consumer Surplus Factors Affecting Long-Run Equilibrium in Monopoly Markets Identification of Market Structure Econometric Approaches Simpler Measures Summary Practice Problems Solutions 99 100 101 103 104 106 107 108 109 110 113 117 Aggregate Output, Prices, and Economic Growth Introduction Aggregate Output and Income Gross Domestic Product The Components of GDP 119 120 121 122 129 indicates an optional segment 63 63 64 69 69 71 73 75 77 78 82 85 86 86 87 87 88 89 91 93 96 97 98 Contents iii GDP, National Income, Personal Income, and Personal Disposable Income Relationship among Saving, Investment, the Fiscal Balance and the Trade Balance Aggregate Demand and Aggregate Supply Aggregate Demand Aggregate Supply Shifts in the Aggregate Demand Curve Equilibrium GDP and Prices Economic Growth and Sustainability The Production Function and Potential GDP Sources of Economic Growth Measures of Sustainable Growth Measuring Sustainable Growth Summary Practice Problems Solutions Reading 11 Understanding Business Cycles Introduction Overview of the Business Cycle Phases of the Business Cycle Leads and Lags in Business and Consumer Decision Making Market Conditions and Investor Behavior Credit Cycles and Their Relationship to Business Cycles Applications of Credit Cycles Consequences for Policy Business Cycle Fluctuations from a Firm’s Perspective The Workforce and Company Costs Fluctuations in Capital Spending Fluctuations in Inventory Levels Consumer Behavior Consumer Confidence Measures of Consumption Income Growth Saving Rates Housing Sector Behavior Available Statistics Sensitivity to Interest Rates and Relationship to Credit Cycle The Role of Demographics Impact on the Economic Cycle External Trade Sector Behavior Cyclical Fluctuations of Imports and Exports The Role of the Exchange Rate Overall Effect on Exports and Imports Theoretical Considerations Historical Context Neoclassical Economics The Austrian School indicates an optional segment 132 138 142 142 146 147 160 171 173 175 180 183 186 190 195 199 199 200 201 205 205 207 207 208 209 209 210 212 214 214 214 215 216 216 217 217 217 217 218 218 219 219 220 221 222 223 iv Contents Monetarism Keynesianism Modern Approach to Business Cycles Economic Indicators Types of Indicators Composite Indicators Leading Indicators Using Economic Indicators Other Composite Leading Indicators Surveys The Use of Big Data in Economic Indicators Nowcasting GDPNow Unemployment Unemployment Inflation Deflation, Hyperinflation, and Disinflation Measuring Inflation: The Construction of Price Indexes Price Indexes and Their Usage Explaining Inflation Summary Practice Problems Solutions 223 223 226 227 227 228 228 229 230 232 232 232 233 236 236 240 240 242 243 248 253 257 263 Study Session Economics (2) 267 Reading 12 Monetary and Fiscal Policy Introduction to Monetary and Fiscal Policy Monetary Policy Money: Functions, Creation, and Definition The Functions of Money Paper Money and the Money Creation Process Definitions of Money Money: Quantity Theory, Supply and Demand, Fisher Effect The Demand for Money The Supply and Demand for Money The Fisher Effect Roles of Central Banks & Objectives of Monetary Policy The Objectives of Monetary Policy The Costs of Inflation Monetary Policy Tools Open Market Operations The Central Bank’s Policy Rate Reserve Requirements The Transmission Mechanism Inflation Targeting Central Bank Independence Credibility Transparency 269 270 272 272 273 274 277 278 279 280 282 285 288 289 291 292 292 293 293 295 296 297 297 indicates an optional segment Contents Reading 13 v Exchange Rate Targeting Monetary Policies: Contractionary, Expansionary, Limitations What’s the Source of the Shock to the Inflation Rate? Limitations of Monetary Policy Roles and Objectives of Fiscal Policy Roles and Objectives of Fiscal Policy Deficits and the National Debt Fiscal Policy Tools The Advantages and Disadvantages of Using the Different Tools of Fiscal Policy Modeling the Impact of Taxes and Government Spending: The Fiscal Multiplier The Balanced Budget Multiplier Fiscal Policy Implementation Deficits and the Fiscal Stance Difficulties in Executing Fiscal Policy The Relationship between Monetary and Fiscal Policy Factors Influencing the Mix of Fiscal and Monetary Policy Quantitative Easing and Policy Interaction The Importance of Credibility and Commitment Summary Practice Problems Solutions 302 305 306 306 311 312 316 320 International Trade and Capital Flows Introduction & International Trade-Basic Terminology International Trade Patterns and Trends in International Trade and Capital Flows Benefits and Costs of International Trade Comparative Advantage and the Gains from Trade: Absolute and Comparative Advantage Gains from Trade: Absolute and Comparative Advantage Ricardian and Heckscher–Ohlin Models of Comparative Advantage Trade and Capital Flows: Restrictions & Agreements- Tariffs, Quotas and Export Subsidies Tariffs Quotas Export Subsidies Trading Blocs, Common Markets, and Economic Unions Capital Restrictions Balance of Payments- Accounts and Components Balance of Payments Accounts Balance of Payment Components Paired Transactions in the BOP Bookkeeping System Commercial Exports: Transactions (ia) and (ib) Commercial Imports: Transaction (ii) Loans to Borrowers Abroad: Transaction (iii) Purchases of Home-Country Currency by Foreign Central Banks: Transaction (iv) 343 343 344 348 351 indicates an optional segment 323 324 325 326 326 327 330 331 332 332 334 336 341 354 354 360 362 363 365 366 368 373 376 376 378 380 380 381 381 382 vi Reading 14 Contents Receipts of Income from Foreign Investments: Transaction (v) Purchase of Non-financial Assets: Transaction (vi) National Economic Accounts and the Balance of Payments Trade Organizations International Monetary Fund World Bank Group World Trade Organization Summary Practice Problems Solutions 382 383 383 388 389 391 392 395 398 402 Currency Exchange Rates Introduction & The Foreign Exchange Market The Foreign Exchange Market Market Functions Market Participants, Size and Composition Market Size and Composition Exchange Rate Quotations Exchange Rate Quotations Cross- Rate Calculations Forward Calculations Exchange Rate Regimes- Ideals and Historical Perspective The Ideal Currency Regime Historical Perspective on Currency Regimes A Taxonomy of Currency Regimes Arrangements with No Separate Legal Tender Currency Board System Fixed Parity Target Zone Active and Passive Crawling Pegs Fixed Parity with Crawling Bands Managed Float Independently Floating Rates Exchange Rates and the Trade Balance: Introduction Exchange Rates and the Trade Balance: The Elasticities Approach Exchange Rates and the Trade Balance: The Absorption Approach Summary Practice Problems Solutions 405 406 407 413 418 421 424 424 428 431 439 439 440 442 444 445 446 446 446 447 447 447 451 452 457 461 464 467 Financial Statement Analysis Study Session Financial Statement Analysis (1) 473 Reading 15 Introduction to Financial Statement Analysis Introduction Scope of Financial Statement Analysis Major Financial Statements - Balance Sheet Financial Statements and Supplementary Information 475 476 476 483 483 indicates an optional segment Contents vii Statement of Comprehensive Income 488 Income Statement 488 Other Comprehensive Income 491 Statement of Changes in Equity and Cash Flow Statement 492 Cash Flow Statement 493 Financial Notes, Supplementary Schedules, and Management Commentary 495 Management Commentary or Management’s Discussion and Analysis 498 Auditor's Reports 499 Other Sources of Information 502 Financial Statement Analysis Framework 503 Articulate the Purpose and Context of Analysis 504 Collect Data 505 Process Data 506 Analyze/Interpret the Processed Data 506 Develop and Communicate Conclusions/Recommendations 506 Follow- Up 507 Summary 507 Practice Problems 510 Solutions 513 Reading 16 Financial Reporting Standards Introduction The Objective of Financial Reporting Accounting Standards Boards Accounting Standards Boards Regulatory Authorities International Organization of Securities Commissions The Securities and Exchange Commission (US) Capital Markets Regulation in Europe The International Financial Reporting Standards Framework Qualitative Characteristics of Financial Reports Constraints on Financial Reports The Elements of Financial Statements Underlying Assumptions in Financial Statements Recognition of Financial Statement Elements Measurement of Financial Statement Elements General Requirements for Financial Statements Required Financial Statements General Features of Financial Statements Structure and Content Requirements Comparison of IFRS with Alternative Reporting Systems Monitoring Developments in Financial Reporting Standards New Products or Types of Transactions Evolving Standards and the Role of CFA Institute Summary Practice Problems Solutions 515 516 516 517 518 519 520 520 523 524 525 526 527 528 528 528 529 530 530 531 532 533 534 534 535 537 539 Glossary G-1 indicates an optional segment ix How to Use the CFA Program Curriculum Congratulations on your decision to enter the Chartered Financial Analyst (CFA®) Program This exciting and rewarding program of study reflects your desire to become a serious investment professional You are embarking on a program noted for its high ethical standards and the breadth of knowledge, skills, and abilities (competencies) it develops Your commitment should be educationally and professionally rewarding The credential you seek is respected around the world as a mark of accomplishment and dedication Each level of the program represents a distinct achievement in professional development Successful completion of the program is rewarded with membership in a prestigious global community of investment professionals CFA charterholders are dedicated to life-long learning and maintaining currency with the ever-changing dynamics of a challenging profession CFA Program enrollment represents the first step toward a career-long commitment to professional education The CFA exam measures your mastery of the core knowledge, skills, and abilities required to succeed as an investment professional These core competencies are the basis for the Candidate Body of Knowledge (CBOK™) The CBOK consists of four components: ■■ A broad outline that lists the major CFA Program topic areas (www.cfainstitute org/programs/cfa/curriculum/cbok); ■■ Topic area weights that indicate the relative exam weightings of the top-level topic areas (www.cfainstitute.org/programs/cfa/curriculum); ■■ Learning outcome statements (LOS) that advise candidates about the specific knowledge, skills, and abilities they should acquire from readings covering a topic area (LOS are provided in candidate study sessions and at the beginning of each reading); and ■■ CFA Program curriculum that candidates receive upon exam registration Therefore, the key to your success on the CFA exams is studying and understanding the CBOK The following sections provide background on the CBOK, the organization of the curriculum, features of the curriculum, and tips for designing an effective personal study program BACKGROUND ON THE CBOK CFA Program is grounded in the practice of the investment profession CFA Institute performs a continuous practice analysis with investment professionals around the world to determine the competencies that are relevant to the profession, beginning with the Global Body of Investment Knowledge (GBIK®) Regional expert panels and targeted surveys are conducted annually to verify and reinforce the continuous feedback about the GBIK The practice analysis process ultimately defines the CBOK The CBOK reflects the competencies that are generally accepted and applied by investment professionals These competencies are used in practice in a generalist context and are expected to be demonstrated by a recently qualified CFA charterholder © 2021 CFA Institute All rights reserved ... Their Usage Explaining Inflation Summary Practice Problems Solutions 22 3 22 3 22 6 22 7 22 7 22 8 22 8 22 9 23 0 23 2 23 2 23 2 23 3 23 6 23 6 24 0 24 0 24 2 24 3 24 8 25 3 25 7 26 3 Study Session Economics... 199 20 0 20 1 20 5 20 5 20 7 20 7 20 8 20 9 20 9 21 0 21 2 21 4 21 4 21 4 21 5 21 6 21 6 21 7 21 7 21 7 21 7 21 8 21 8 21 9 21 9 22 0 22 1 22 2 22 3 iv Contents Monetarism Keynesianism Modern Approach to Business Cycles ... Transmission Mechanism Inflation Targeting Central Bank Independence Credibility Transparency 26 9 27 0 27 2 27 2 27 3 27 4 27 7 27 8 27 9 28 0 28 2 28 5 28 8 28 9 29 1 29 2 29 2 29 3 29 3 29 5 29 6 29 7 29 7