Great question! It is exact, but only within the radar's range. If the chest is inside the range, you get the exact distance (e.g. "2" = the chest is somewhere on that highlighted ring). If it's outside, you just get a puff of smoke, which means "nothing within range" and greys out those tiles.
Distance also changes by island: some count rings (diagonals OK), some count steps (no diagonals), and rocky islands make you walk around the rocks. Tapping an old number brings its ring back up.
And I love the small-island demo idea. Showing how one clue rules out tiles would make a great first-island tutorial. Thanks!