Basically, you can change it to make it seem like your phone has a bigger screen. So, everything is smaller, but you can fit more in terms of icons / widgets and some would say that it looks sharper and just better all around. However, it can cause issues with apps from the Market and with CM9 unless you replace the Phone.apk. Screenshots provided for comparison. The left is standard density of 160, the right is mine. My homescreen, density of 120, notice the status bar and how much smaller the bottom dock is, also, I have 5 icons on the right and room for 2 more. Also notice a huge difference in Messaging, lots more room for messages and such, but I couldn't post any sort of decent screenshot of my SMS logs, lol.
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Oh ok, so its just like Androids version of Resolution for windows.
Thanks ^^