Is it better to have a player application stretch the video or to use a resolution that matches the video file? I have a Samsung LN40A550 LCD TV, purchased in 2008.  I have a 2011 mac mini connected via HDMI, and I use VLC Media Player to play tv/movies, most often x264/mkv files.  

The native resolution of the TV is 1920x1080 so that's what I have the mac set to output most often, and I get video files with the same resolution whenever I can.  However, often the video files I get are only 1280x720.  

So my question is:  Will it look better to leave the mac set to the 1920x1080 resolution, and then have VLC's full screen mode stretch the 1280x720 image to 1920x1080, or will it look better to set the mac to output a 1280x720 signal, and then VLC doesn't do any stretching.  

By "look better", i mean picture quality and the shading / filling in of pixels, not frame rate or anything CPU performance related, obviously the latter would have less CPU load.
That's really a loaded question.  In general, the rest of your content is going to look better if you leave the computer at native resolution and let the computer scale the video.  If for example you have a video that is a slightly different size, then you would end up scaling to get the resolution setting and again to get the native resolution of the display.  The TV should be able to take into account more information about the exact display too, so I'd leave the computer at native resolution and let software scale it.