The fan in an air handler is typically stated to have a flow rate at a given static pressure (e.g. page 7 of the Lennox CBX25UH air handler specifications here). In my experience, almost all pressures in HVACR are stated in terms of gauge pressure; as you suspected, 0.5 in w.c. is a gauge pressure (generally noted as in w.g.). Some fan flow rates are stated in terms of total static pressure, where the evaporator, heater core, filter, duct friction loss, diffuser pressure drop, etc. contribute and must be taken into account when sizing the blower package.
The higher the external static pressure, the lower the air flow rate--the system pressure is a measure of resistance to the flow created by the fan. For external static pressure, the major contributors are friction loss in the duct work and at the diffuser. CaptiveAire (an exhaust hood manufacturer) has a good explanation of total, static, and velocity pressure here. The ASHRAE fundamentals handbook also has an extensive section on duct work, but unfortunately is not freely available online--you may be able to find a copy at your local library or an older version at a discount book store (the duct chapter has not changed much for this purpose).
The fan creates a low pressure region on one side (return) and a high pressure region on the other (supply). If you have a very large static pressure (i.e. high friction), you will have a low resulting velocity pressure and low resulting air flow rate. To simplify design, manufacturers state the fan's capacity to overcome a given static pressure with a resultant flow rate. Unless your static pressure is so large that the fan stalls or operates outside of its stable region (see this page on fan curves), you will not damage the air handler, but you will reduce the air flow rate and waste energy.
Assuming you are using a device which can measure the static and dynamic/velocity pressure (e.g. pitot tube), you will ideally have a constant total pressure at all parts of the system (this concept is part of Bernoulli's principle, pressure drop due to friction does represent energy loss and is added to one side of the equation when comparing two states). In your scenario, the diffuser represents an obstruction to the flow, so you will have a higher static pressure and lower velocity pressure before the diffuser. The region outside of the diffuser is at a lower pressure relative to the duct, so the energy represented by the static pressure component becomes part of the velocity component, resulting in a greater fluid velocity. If you were to close all of the diffusers, you would create a very large static pressure on the supply side of the system and would lower the flow rate. You can measure pressure at any point in the system and will get the same total pressure (minus energy loss due to friction). Immediately at the supply side of the air handler, the energy (and pressure) is highest, near the diffuser, you have experienced some energy loss due to friction.
For diagnostic purposes, it can be useful to measure pressure along the supply side to determine if you have excess friction loss or, more commonly, duct leakage.
