That's correct, the higher aspect ratio means less area for a given diagonal.
A 17" widescreen (16:10) is 130 in^2 (17^2/(16^2+10^2)*16*10), while a 17" normal (4:3) is 139 in^2 (17^2/(4^2+3^2)*4*3). A 20" widescreen comes in at 180 in^2 (20^2/(16^2+10^2)*16*10).
The actual width and height are left as a trivial exercise for the reader (or you can search the forums for all the people who have asked this question previously).
The relatively large, white bezel may also contribute to the appearance of the iMac screen being small.