The issue here is the difference between virtual memory, physical memory, and the ability of Windows to recognize each.
By default, 32 bit Windows OS's assign a virtual memory space of 4 gB to each process. 2 gB is reserved for the kernel, and 2 gB is reserved for the user processes. On some systems you can set this to be 1 gB for the kernel, and 3 gB for the user - but it requires that the OS be set to use it AND that the application that's running is aware of this ability.
So, if you've got a couple of processes running, each will have 4 gB of virtual memory available to it (but not necessarily being used) - regardless of how much physical memory you have. As activity increases in the OS, the system will utilize the physical memory as much as it can. Then, as it "overflows" the physical memory, it'll be paged out onto the pagefile (which slows down the operation because it's reading/writing to the hard disk rather than the physical memory. Virtual memory doesn't care if it's using physical memory or the pagefile - it's all just memory to it.
Physical memory is limited (in a 32 bit OS) to 4 gB (although there's a whole pile of exceptions to this). And, since some of the memory is reserved for lower level stuff like hardware devices, you'll only see part of it. Additionally, some older systems had issues with DMA transfers with 4 gB of RAM and a 32 bit OS - but that's been fixed in the newer (last year or two) motherboards. Next, there may be some memory taken from your system for the video graphics adapter (if it's built into your motherboard)
In general, you can expect to see between 2.5 and 3.6 gB of RAM when you have 4 gB installed on a 32 bit OS - the factors mentioned above will affect your results.
Oh, and none of this addresses a hardware failure that could be decreasing the amount of RAM that's visible - so you may want to run a free memory test to see if everything seems to be OK. Here's the one that I recommend: http://www.memtest86.com/
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