There are several ways to do this.
For very small distance measurements, a laser can be used as the coherent light source for the interferometer, and the offset of the interference fringes can be calculated while moving the measurement reference point connected to the interferometer's mirror. High-quality sensors and software can interpolate the fringes to a very small fringe fraction, and depending on the specific interferometer, the fringes typically correspond to the wavelength or half-wavelength of the laser used.
Lasers can also measure distance using "TOF" (Time of Flight) measurements. If the laser operates in pulsed output mode, the pulses turn on and off very quickly. Essentially, a timer starts when the pulse leaves the laser and stops when the detector receives the reflected pulse signal. Dividing the time increment by the speed of light gives the round-trip distance. To generate pulses, some solid-state lasers can be rapidly switched on and off using electronic devices.
For higher resolution, laser cavity management techniques, such as mode-locking, can be used. This can connect the phases of the longitudinal modes of the laser cavity so that they remain in phase during each round trip within the cavity (i.e., a super-bright, super-short light pulse will be generated in the time it takes for a photon to travel back and forth between the cavity mirrors, with almost no interference between them).
This technology is sometimes referred to as laser ranging or LIDAR.
The shorter the pulse, the higher the potential resolution of the device. The speed of light is about one foot (about 0.2 meters) per nanosecond, so the pulse length of a mode-locked laser is about 100 picoseconds (about 0.75 meters), or about 0.75 inches (about 0.9 centimeters).
