Joanna, when we record an instrument we generally put the microphone very near it. This way, we loose part of the natural reverberation of the room we are playing in: in my opinion, the digital reconstruction of the (lost) ambience is not dishonest at all 🙂
The compression might be a different case and it refers to a well-known psycho-acoustical phenomenon: the louder the music is, the more we are emotionally involved. If you google “loudness war”, you will see how exploited this circumstance has been in the last few years by commercial music.
In home productions, a light compression can help the recording be a little more effective, without actually editing anything of your performance. So, maybe it is a little bit of a cheating on the psychological level, but it doesn’t alter what you have played.
Daren, true that the lowest notes of a chord are loudest, but I have noticed that this can be (again, psycho-acoustically) corrected by keeping the lowest notes shorter. It is technically challenging (we have to articulate differently the various notes of the chord) but it seems effective. This is an old “trick” used when playing polyphonic music that could be applied to the melodica as well, I guess… Can you confirm this?