Translation:What do people call that instrument?
'how do people call that instrument' is a bad translation. It's too literal.
'Como se chama?', which we learn to mean 'what is your name?', literally translates to how do you call yourself, or something to that effect.
I'm sure a native speaker can explain it better than me or tell me that i'm wrong, but it seems that when using the verb 'chamar -to call' como is better translated as what. so in this situation, the way more natural sounding translation would be "What do people call that instrument?"