The dotted line represents the point on the shoulder where the cartridge would headspace
Chamber Size
Look at the picture below. The top chamber represents a military rifle, the bottom one a commercial sporter. With many military rifles, their chambers can be significantly longer than, say, a Remington 700. Note that the military chamber would fail a NO GO check, but pass a FIELD check using the proper shop (military) gauges.

There is a .013" difference in chamber length however, between these two "Safe & Serviceable" rifles!