This video was published by Eurogamer‘s Digital Foundry department about two weeks ago; it shows footage captured from various games in the Gran Turismo series. What is remarkable about this video is that the same cars and tracks are shown on the original Playstation, the PSP, the Playstation 2 and Playstation 3. Since the developer (Polyphony Digital) has a reputation for squeezing the best visuals out of Sony’s platforms, this promises a rare “apples-to-apples” comparison across multiple hardware generations.
To my eyes, the display resolution changes drown out the more subtle differences in modeling, shading and lighting; it is also apparent to me that Polyphony no longer sits on the graphics throne in this generation. Other first-party PS3 titles such as Uncharted 2 and God of War III look better, in my opinion. The shadows are a particular weak spot: in places their resolution seems no higher than on the original Playstation!
More information on how the video was captured (as well as high-quality download links) can be found in Digital Foundry’s blog post.
The shadows indeed are very low resolution, another major shortcoming for GT5’s graphics is the horrendous handling of alpha transparency for smoke particles and the likes. (see http://images.eurogamer.net/assets/articles//a/1/3/0/4/5/7/0/Dodgy_Alpha1.jpg.jpg for an example).
That being said though, I do think the modelling (of the 200 premium cars) and shading is top notch and add a lot to the experience compared to the previous iterations of the series, but as you said, resolution is probably the main factor there. Also, it should be noted that Uncharted 2 is a 30fps title, where God of War 3 and GT5 (mostly) run at 60fps.
My understanding is that not only does it run at 60 fps, it also supports 1080p resolution. It sounds like they chose performance over quality, and succeeded. Otherwise, there isn’t much excuse for lousy shadows in a racing game (racing games having very constrained environments, which allows for generally great graphics).