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Depending on the bitrate that you are assigning, your resolution should not be too high so as to result in macroblocks. For example, for a resolution of 640x(), I use a minimum amount of bitrate of 1000. The bitrate used changes proportionally with the resolution that I choose. In my opinion, it is better to use a lower resolution than to risk macroblocks, which are sorely obvious to the eyes.
Wow finally a reply, thanks Enchanter. One more question, what will be the difference between a movie encoded at 480x... and one encoded at 576x... if both are played on a monitor at 800x600.
It really depends on the resolution that you are using. For one, if your bitrate is especially low, using a lower resolution will yield better quality since the resulting video is less likely to suffer from noise artifacts and macroblocks (which are BLOODY obvious). I can't tell you how much the bitrate should be as the requirement differs with each video. Experiment with the different resolutions and see how they look (when played full-screen).
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