More horizontal resolution won't help much, but you'll want 480 lines vertically or you'll be losing half the picture. That is, unless you're talking per field rather than per frame -- 352x240 at 60fps is fine since you're capturing both the odd and even fields, while 352x240 at 30fps means you're essentially dropping every other field. Capture software is often ambiguous on the whole field vs. frame thing. (In case anyone reading this isn't aware of the distinction: a field is essentially one vertical pass across the image, which on an interlaced display skips every other line, while a frame is the entire image, two fields on an interlaced display.)
VCDs are half the vertical resolution of VHS, for example. On a sufficiently small screen you won't be able to tell much difference, but on a big screen VCDs look horribly blocky.
MPEG2 is more time-consuming to encode but will give you better picture quality (fewer compression artifacts) for the same number of bits if properly configured. Properly configuring it, assuming you're using the free TMPGEnc encoder, isn't exactly trivial.
