Either will work. It depends a great deal on the end user and their configuration. You could take a screen grab of an open browser and open it in Photoshop to see how much space the chrome (borders, menus, scrollbars, etc) takes up. One way of doing it is to place the chrome on a layer of its own, deleting the page content so lower layers show through.
Keep in mind that users are very unpredicable. Do they have an extra toolbar cutting into the height? Is their History pane open, cutting into the width? Many web designers create flexible layouts that can adapt to all these situations, while others make fixed width layouts that are narrow enough to suit most browsers. Height isn't a big issue, but take care with the width.