currency

I had a discussion with some people about how to determine the strength of a currency, specifically the US Dollar. Now it is fairly well accepted by most economists that a certain level of inflation is not only to be expected but is also desirable. Now, any level of inflation means you can buy less with your dollar year after year. Does this mean the dollar is weak and getting weaker? The general scenario of the last few years would argue the other way, many things have gotten cheaper. Houses are a great example. Electronics seem to get cheaper all the time. Many other items have experienced price declines over the last few years, even if the retailer’s like to pretend they can sell for “list”.
So, if I can buy more house or better electronics for less money than two years ago, has the dollar increased in value? That seems to be the very definition of an increase in value. Yet the majority of us feel that the dollar is weak and getting weaker.
Some of this is based on the rhetoric we hear all the time. It is actually fairly easy intellectually to say what should happen to a currency. If you subtract the rate of inflation from the rate of productivity growth you will get either a negative or a positive number. A positive number would indicate that goods and services are getting cheaper a negative number would indicate the opposite. A positive number should imply that goods and services are getting cheaper.
Now the increases in productivity may have other consequences concerning employment but it clearly has good implications for the currency.