Resolution scaling is how much the video is stretched out to fit your screen. If you set the game to 720p (1280×720) but your monitor is 1080p (1920×1080) then the video will be stretched to 225% its original size to fill your screen. You might not notice much of a difference depending how close you are to your screen and how much detail is in the game but your computer is drawing less than half as many pixels than it would if it were running at full 1080p resolution so your FPS will be much higher.
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