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Audacity's Compressor effect reduces "dynamic range" by making the loud sections quieter, then optionally amplifies the compressed audio to be as loud as possible without clipping. This increases the perceived overall loudness of the audio.
Related article(s):

The terms of the Compressor effect are as follows:

  • Threshold - the volume level at which compression starts to be applied. The further right the slider, the louder the input has to be before compression is applied.
  • Ratio - if the level is above the threshold, how much it will be reduced. For example, if the ratio is 3:1, if the signal is 3dB above the threshold, it will be reduced to 1dB above. The further the slider is to right, the stronger is the compression applied.
  • Attack time - the amount of time the compressor waits to respond after the Threshold is reached
  • Decay Time: (only in Audacity Beta) - how soon the compressor starts to increase the volume level back to normal after the level drops below the Threshold
  • Normalize to 0dB after compressing - if this is checked, then after compression the audio will be amplified to the maximum amount possible without adding distortion

There is a more technical (but not too difficult) explanation of compression on Harmony Central.

Alternative Compressors

  • Chris's dynamic compressor is a Nyquist plug-in that tries to even out abrupt changes of volume by employing "lookahead". This attempts to anticipate volume changes so that compression starts to be applied before the volume level increases to the threshold level. It also has options to soften the softer audio, and invert loudness.