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...