When you sew the blocks together, individually they will be 4 inches. When the blocks are sewn together to make your quilt, when all 4 sides of the block are sewn, it will measure 3 1/2.
Unfinished is the size of the block before the blocks are sewn together.
Finished is the size when all four sides have something sewn to it. (Quilters seam is 1/4 inch, so the block would lose 1/4 inch around or 1/2 for top and bottom, and 1/2 for the 2 sides.)