We haven't gotten a firm read on the exact screen dimensions, so we're using 7-inches generically here. Our source has indicated, however, that the 7-inch iPad will be identical in every way to the current 9.7-inch iPad, just scaled down. That seems to include a 2048x1536 resolution display, just like the new iPad. If accurate, that would put the pixel density at around 326 ppi, identical to the iPhone 4S (and higher than the 264 ppi new iPad) retina display. It's hard to imagine a device with a panel like that having a price tag of just $200, especially when the baseline new iPad comes in at $500, but one way Apple will be keeping costs lower is by providing less storage capacity. $200 will get you 8GB. That's identical to the current entry-level iPod touch, which also starts at $200. (And no, Apple won't be replacing the iPod touch with the 7-inch iPad, both devices will remain in the product lineup -- though it'll be interesting to see what happens with iPod touch pricing and storage capacity.)
A recent report from DigiTimes also predicted the release of a 7-inch tablet in 2012 but in August rather than October.