Smart Objects in Photoshop CS and Elements are layers that are completely embedded into the file at it’s full resolution. That means that if you resize it smaller or larger, the original pixels are referenced.
Let’s back up a second. If you copy and paste an image into your document, it will paste as a regular “raster” layer. When you resize this image Photoshop reinterprets the pixel data and replaces it. When you make an image smaller, Photoshop removes pixel data from the image. When you make it larger, it calculates the new pixel data by comparing it’s surrounding pixels and creates new ones. For best quality, you should not enlarge images more than 200%. And, once you size something down, you shouldn’t resize it back up again. If you do, you’ve resampled the image twice and are using averaged pixel data instead of the original image data. That’s where Smart Objects shine. They actually embed the original image into the file so that when you downsize, upsize, rotate, flip or flop, Photoshop can always refer back to the original pixel data. Until you flatten your file, that image data is not discarded. The negative is that it can make your files much much larger. But, the benefit is your images are much crisper.
Let me show you an example. In the image below, the top image was a smart object that was reduced to 25%, then resized back up to the original size. The bottom image was a regular “raster” layer that went through the same exact reduction and re-enlargement. The end result is a beautiful crisp image from the smart object and a blurry, jagged, pixelated image from the raster layer. This is obviously a dramatic example. Rarely would you reduce something to 25% and blow it back up. I’ve exaggerated the effect for demonstration purposes.
You can tell your layer is a smart object if the smart object icon shows up in the layers palette. Here’s a sample layer with the smart object icon.
So, how do you make sure your layers are smart objects? There are two main ways. First, you can “place” them instead of copy and paste. With your layout open, click FILE>PLACE instead of open/copy/paste. The second option is to paste the photo, element or paper into your document, then right+click on the layer and choose “Convert to Smart Object” from the drop down menu.
TIP: When you are done with your layout and are sure you won’t be changing the size again, rasterize the layers by right+clicking the layer and choosing “Rasterize Layer” to apply the pixel transformations permanently. Now your file can be as small as possible.
I hope this helps explain smart objects in a useful way! If you have any questions on this or any topic, leave a comment! Happy Scrapping!