This is indeed a nice trick, however there is more to this issue than just the encoding parameters.
YouTube uses bit per pixel values for each resolution (240p, 360p, 720p) which are likely proportional to the number of bits of the resolution.
In clear, this means that it should use the same bit per pixel values for lower resolutions than for higher ones. Inversely, this means that doubling a low resolution video to a high resolution one by simply enlarging the pixels will increase the bit per retro-pixel values for that video and thus the perceived quality.
To verify it you can do the following experiment:
- Record a 240p video from an emulator.
- Expand that video to 720p, without any filtering, effectively triple every pixel horizontally and vertically.
- Upload that video to YouTube.
And you should notice that the pixels of the original video are perfectly visible on the 720p video: YouTube has allocated more bits per (retro) pixel.
You can also do a quick YouTube search for SD and HD resolutions of the same retro video : invariably the SD videos will be much fuzzier and less precise than the HD ones even though in theory the SD resolution should perfectly encode the original content.