The 27" model has more screen resolution and a more powerful VGA.
About the difference in performance,well in games a HD 4850 is noticeably faster than the 4670 also the 27" model can be configured with Core2Duo CPUs and i7/i5 CPUs whereas the 21.5" model can be configured only with Core2Duo
Of course, games don't matter unless you'd be running windows on it. If you're looking for a fast computer, the Imac is not the way to go. For the same price, you could get a MUCH faster computer if you went with a windows PC.
I agree that it is easy to make a better configuration for $2000. But with a 27'' IPS High res Display (that costs about $1000) is it still possible?
I know that IPS is not the best display for all application.