The template is a file that tells the blogging system where to put what. Here is a really simplified example: the blogging system will have a template tag for each of the page elements: the banner, the body, sidebar one, sidebar two, sidebar three, module one, module two, module three, etc. The template for My Wonderful Blog might then only use the following template tags: the banner, the body, sidebar one with modules one and three. I would get to decide which ones are used and tell the blogging system where to put them on the page. For example, would I want my sidebar one on the left or the right of my body? Which module do I want on the top of my sidebar?

So the template tells the blogging system what stuff you want on your blog and how to organize that "stuff" on your blog.

Here is a screen shot from the Template settings on Blogger. Click the thumbnail to enlarge it more. Each section (or what I referred to as template tag in the text above) can be moved around on the page, changing what will appear where on your main page.