One of the primary purposes of having a display with higher resolution is so that non-rectilinear shapes and edges will look smoother. You may recall "ancient" low-resolution displays where a rectangle looks fine, but the sides of a triangle or a circle would show "jaggys".
By "reporting" the display size as 1280x800, objects & fonts will be the size you expect to see (and are readable!). The display chip handles the interpolation/smoothing of the edges so that your eye discerns smoother curves than one might see on a "native" 1280x800 display.
As Bruce Van Allen commented, showing as a list, and then enabling to show all possible resolutions, will allow you to try the effects of different settings.
Why all the different possible resolutions? For one use-case, when mirroring a screen of a different native size and resolution the higher native resolutions of the MacBook lets it more accurately "mirror" the resolution of a screen with a different aspect ratio and resolution.