My experiences on an imbalanced and progressively more horde-dominated server beg to differ.
We judge faction balance by the number of people playing any given faction actively on a server. Both factions participate in the same activities for the same professions and often even the same quests.
We, the players, don’t “measure” it. We report what we experience, and when those experiences are overwhelmingly negative, it becomes a problem – with faction imbalance being the primary culprit. When Alliance in a 30-70 horde dominated server ask for reinforcements because a few horde are camping farming spots and pushing you out, you’re practically inviting snide ridicule in zone / world chat.