Program prices: check the "Big Mac" index.

Are international program prices going up? Is the U.S. dollar getting stronger? The answer can only come from a crystal ball or... something also rounded, but calorie-laden: McDonald's Big Mac.

For the past seven years, The Economist has been using Big Macs to find out whether various currencies are at their fair exchange rate with the U.S. dollar.

The Economist's Big Mac index relies on the purchasing-power parity (PPP), meaning that the exchange rate between two currencies is fair when it matches the price of an identical product in both countries. According to this theory, currencies such as the yen, the lira or the French franc are all overvalued (see chart), while the Canadian and Australian dollars are undervalued.

So, what does the Big Mac say about program prices? If the theory proves accurate, it says that in Italy, for example, the lira could go as low as 1,974 Lira for one U.S. dollar. Indeed. Italian banks sold October 1993 futures at 1,644 Lira to the U.S. dollar. In France, the franc could go as low as 8.11 French Franc to the dollar, and in the U.K. the pound couId plummet to 1.27 pounds to the dollar.

How accurate is the Big Mac theory? The Economists reporter who prepared the chart wouldn't say. In the view of John S. Burke, a Los Angeles-based exchange rate expert, the Big Mac index is accurate in the long run. It is estimated that within two years, the exchange rates will get close to today's PPP, but will not match it.

Now, if all program sales contracts were in U.S. dollars, the losses would clearly be at the buyers' end. If, on the other hand, contracts were in local currencies, the seller would be absorbing the losses. In territories like Australia, where most of the sales are in Australian dollars, the seller is expected to gain substantially just in the exchange rate.

In relation to the exchange rate fluctuations, program prices in most cases are expected to rise in countries where the local currency is now overvalued, and to be lower where the currency is undervalued.

This assessment comes from several considerations: In places like Argentina, the U.K., France, Italy and Spain, to name a few, the program market has been kept artificially low. The expansion of television services, coupled with high production costs, will force TV outlets to bid for imported quality programs. In Brazil, for example, where the cruzeiro is considered 23 per cent overvalued in PPP terms, prices are expected to rise. despite the recent cuts in the acquisition budget of TV Globe.

In addition, the Big Mac factor could expedite payments (the longer they wait, the more the dollar will cost). Finally, some of the territories with overvalued currencies could rescind the practice of buying now for 1995 delivery and payment. In this case, the gain (the rate of inflation plus real term cost increases) would be offset by the higher exchange rate, if contracts were in U.S. dollars. Independently from the Bic Mac index. a well informed buyer/seller also expects price increases for "quality programs."

Conversely, in territories like Hong Kong, Canada, Australia, etc. where the currency is undervalued, prices in most case and in the short run are expected to go down for several reasons: First, because of more acquisition power and larger, less selective volume buying (which will compensate for the lower prices). Secondly, because current prices are relatively high compared to comparable international markets.

Finally, the currencies in areas where, in PPP terms, the U.S. dollar is unrealistically strong are expected to fall from a low four per cent (Canada) to a high 50 per cent (Russia). In terms of program sales, it means that Russia, for example, in the long run, could be paying even less than it is now.

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