Will the box office exchange rate index replace The Economist's Big Mac Index?

You may be familiar with The Economist's Big Mac Index. It tracks the "real" value of 32 currencies against the U.S. dollar. The Big Mac Index indicates what a currency's exchange rate should be, taking into consideration the country's economic environment.

As a reference point, The Economist uses the price of a McDonald's Big Mac hamburger in local currencies. This concept is based on the theory of purchasing-power parity, or PPP. The Economist explains that "in the long run, the exchange rate of two currencies should move toward the rate that would equalize the prices of an identical basket of goods in each country."

This strategy was first devised in 1986 by the chaps at the now-fashionable British weekly. At one point it must have proven to be somewhat accurate, since the magazine continues to publish an updated version of it. The problem, [TABULAR DATA OMITTED] according to The Economist, is that in the past the Big Mac Index "has repeatedly signaled that the dollar is significantly undervalued against the other main currencies, yet the greenback continues to slide. Some skeptics would like us to dump the index."

We at Video Age are not skeptics. We actually like the concept of "burgernomics." However, we'd like to replace the unhealthy Big Mac with the more entertaining Box Office Index, in hopes of better tracking the true value of other currencies vis-a-vis the U.S. dollar. In our view, it would provide a better way to check how far currencies are from ideal value levels.

Since almost 80 per cent of theatrical movies are American, the Box Office, tied in to local economic factors, could offer a more uniform reference than the Big Mac. Furthermore, the U.S. studios have found a way to sell the rights to their movies at what seems to be their true worth in each country.

What is all this for? Well, if Video Age's "boxofficenomics" are more accurate than The Economist's "burgernomics," then producers, broadcasters and distributors would be better able to gamble with different currencies.

Here's an example: to calculate the PPP, divide the Australian Box Office ticket price of A$11 by the U.S. ticket price of $8. The resulting PPP of 1.4 compared with the actual exchange rate of A$1.3 indicates that the Australian dollar is overvalued by 7.6 per cent against the U.S. dollar, compared to an undervaluation of 22 per cent in The Economist's Big Mac Index. In our chart, Italy's PPP is 1,500, while the actual exchange rate is 1,602, implying that the lira is undervalued by 6.4 per cent. The Big Mac Index, on the other hand, overvalues the lira by 14 per cent. Many economists report that 1,500 lira (our PPP) is what the actual exchange rate should be.

For Japan, our PPP is 206, making the yen 120 per cent overvalued against the dollar. For the German mark, our PPP is 1.4, implying a perfect exchange rate.

In our view, by using our Box Office Index instead of the Big Mac Index one can better measure the ideal exchange value of various currencies. It could even - if you'll pardon us for suggesting an unproven method - be used as an alternative to buying futures.

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