Lettering's beauty comes in the varying shapes of the letters. Each letter has a different height. Think of lettering size as the distance between lines on notebook paper. For two inch lettering, the lines are two inches apart. Three inch lettering, the lines are three inches apart. And that is where the writing takes place. The wider the lines, the larger the writing. The narrower the lines, the smaller the writing.
The Design Dimensions is the TOTAL of descending letters like g, p, etc PLUS the taller letters like f, h, l, t and all uppercase letters. So the Design Dimension tells you the total measurement of the very tallest and lowest descending letters put together.
Don't focus so much on lettering size as the total dimensions of your design. We consider two inch lettering to be regular size for most home uses. Three inch lettering, we consider to be a large size for most home settings. And four inch lettering, we consider to be xlarge size for most home settings. Office/business settings tend to run larger. 2 inch letters can be read from at LEAST 20 feet away. 3 inch letters can be read from at LEAST 30 feet away and so on.