This COMPRESSION business is always a mine field when starting out. 🙂
Your footage of the AVCHD that the camera shoots and is recorded to it's card is already heavily compressed even at the highest interlaced setting.
More compression means more recording time. As mentioned always use the highest quality if you know the space on the card and the quality selected can do the job.
When you capture/transfer the footage to FCE it will be actually altered (Decomression) to AIC (Apple Intermediate Codec).
This is so FCE can handle each frame in it's editing environment. This blows up the footage to around 40 gig an hour. CoDec is a short way of saying Compression/Decompression.
Maybe you can search the NET for info on this?
When you need to make a DVD/Bluray you export the FCE Timeline.
This is where another compression occurs to turn AIC into DVD language.
Thing is to stop worrying about actual file sizes of the Timeline in FCE as the DVD authoring app will compress the Timeline to whatever it is designed to work with.
eg. a two hour Timeline in FCE contains around 80 gig of info, after compression to iDVD a regular DVD (red ray) will hold the two hours even though the DVD is 4.7 gig.
I hope this makes things a little clearer!!!!
My process is to always shoot at the cameras highest quality that your editing system will support.
At high quality one can afford to loose a bit, but, if it's not there at the shooting stage it's never going to magically appear.
In short; data rate and file sizes are a compromise. The important thing is to have enough knowledge to know that what you start with will suffice for the end result.
Al