Kreg Jig Settings question

Ok, so this might be a really silly question.  I'm in love with my Kreg Jig, but still trying to learn how to properly use it.
So when you are setting the drill guide part, or even the depth collar on the drill bit, to be at the correct setting for the thickness of wood you are using, do you set it to the actual thickness or based upon what it's called.  For example, if I'm using a 1 x 3 do I set it to 1" or 3/4" ?
 
I'm still trying to grasp the fact that a 1 x isn't really 1 inch.  I now know the reasoning behind it, but still find it confusing. 
 
Thanks!