I've noticed that Photoshop makes my image size, specified in inches, smaller than it really is. Approximately 1 inch both in height and width. Since this is an approximation and not exact, and because this image may actually be larger than what Photoshop is showing me, I don't want to recklessly use a larger size in an attempt to solve this problem. I just want Photoshop to show me an image in inches life-sized. It's not a zoom problem either, because I am currently zoomed at 100%. Thanks for any help.
Image size/dimension/resolution can be a confusing topic; I routinely encounter graphic design professionals who don't really understand how it works.
The main thing to keep in mind is that "size" could be either size on screen or size on paper when you print the image out. Pixels are different sizes in different contexts, so the pixels in the image get packed into different sizes. This difference is also a major source of confusion about resolution because people get confused between the resolution of the monitor and the resolution of the printer.
Wrapping your head around the difference is best done with an example. Let's say you have an image that is 600 pixels tall. Meanwhile your monitor is set to 1440x900 and is 8 inches tall (I picked those numbers because that's my monitor.) 8 / 900 is .0089 inches per pixel; 600 x .0089 is 5.34 inches. So the image is 5.34 inches tall on screen.
Now you want to print out your image. The print resolution is set to 200dpi, so 600 / 200 is 3 inches. The image is 3 inches tall on the printed paper.
While understanding the math behind DPI is essential (which jhocking covered in his answer) soft proofing is a lot easier task in Photoshop. Either:
Print Sizeoption or
Print Sizefrom the menu.
This will show image in life-sized inches on your display.
Print Size to work, you must define your screen's correct PPI under
Units & Rulers →
Screen Resolution. By default it is 72 PPI, but it may not suit your screen. While PPI calculation is rather simple (x = dp ÷ di — Where dp = "diagonal resolution in pixels" and di = "diagonal size in inches"), you could just check if your display is listed in e.g. dpi.lv's database or just their calculator.
In turn, changing the setting also changes the default "DPI" value for new screen file presets — but, keep in mind, the DPI value doesn't matter for screen images, so you shouldn't worry about that.