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If your final output is 4:3 DVD, the final comp you render should have D1/DV pixels (use the DV 720x480 .91 PAR preset). If your final output is widescreen (16x9) DVD, use the widescreen DVD (1.21 PAR) preset.
Once you have your comp for final output, enable Pixel Aspect Ratio Correction (PARC) to see the correct proportions. Just realize this is a rather crude approximation of the image that is generated by adding or dropping columns of pixels (unless you use something like the excellent Throttle script to enable high quality PARC), so you will likely see banding and aliasing as a result.
Design with PARC disabled at your peril. You can design in a square pixel comp (use the square pixel preset that corresponds to your final output format), and drop your design comp into a render comp with only a minor loss of quality, but remember that your design comp might need to be scaled to fit the final comp, due to the way AE handles the relationship between comp size and PAR, and any extra pixels in the nested comp still have to be rendered by AE, meaning you will take a (perhaps minor) hit on render times compared to designing at the final output resolution/PAR.
My advice would be to resist the temptation to nest comps too much, especially if this project ever needs to be handed off to someone else (that goes quadruple if it is a design that is meant to be versioned on an ongoing basis). I get handed a lot of projects in which the comps are nested seven or eight levels deep for absolutely no good reason, and I have had to dissect and reverse-engineer some real doozies. Nesting is a great tool, but it can really be abused.
Someone will probably tell you you have the alternative of either stretching your output in the output module or feeding a square pixel movie into whatever application is downstream from AE in your workflow, and both those things are true, but I think stretching your output is playing with fire unless you already understand pixel aspect ratios backward and forward (in which case you would probably opt to work in the native PAR to start with), and putting off figuring out what PAR's are all about only increases the likelihood that you'll get into a fix somewhere down the road.
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Aaron said it all, but just to add, the PAL frame size equivalents of what he mentioned would be 720x576 (you should use the presets).
The standard display PAR would be 1.07 (CS3 and earlier), or 1.09 (CS4). The CS4 value is technically correct.
The anamorphic PAR equivalents would be 1.42 (CS3 and earlier), or 1.46 (CS4).
Ack! Sorry, I skimmed right over the PAL part.
Thank you very much for your answers A.Cobb & Steve!
So you suggest I work and render with the D1/DVPAL (1,07) composition preset. Good.
Now I am unsure how to proceed with my material. When I import .psd or .jpg files within After Effect, they are square pixel right? Should I right-click on those files, click ‘interpret footage’ and choose the same pixel aspect ratio?
OR should I just use the pixel ratio aspect correction alone? OR should I use both i.e. PARC and ‘interpret footage’?
I tried to use both, and the graphics looks definitely too ‘wide’.
It's not only not needed, it would be incorrect to do so.
An important aspect to After Effects is that source items don't have to match the Comp in any way, as long as After Effects has the correct interpretation for the source files.
In other words, if your source files are square pixels and the target comp is non-square, AE will handle the transform automatically for you.
If you change that interpretation, it will be a mistake. Because the graphics were not created usin non-square pixels.
OK. So I will simply use PARC to work with my projects. Thanks!