Video will output to 4K.
Games will output to 1080p.
Most likely, scaling technology will be introduced, either at launch, or later in the console life, to allow for scaling of HD content to 4K. This will be to facilitate 4K TV buyers and allow them to have a better image resolution when viewing HD content.
You can have a 32" TV and have 4K resolution. DPI determines how many pixels you fit within an inch, not how big the screen is. Therefore, a 4K TV could easily be 32", just more pixels are packed into that 32".
Pixel density is your friend. The more pixels you can get in the same a mount of space, the better. Just like it's better to have 1920x1080 on a 32" screen than it is to have 1280x720. The former packs more pixels into the same 32" than does the latter, giving you a better resolution and image fidelity.
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