This usually is the question which comes to any beginner's mind when starting to use Drupal. In Simplest terms.
1. Taxonomy module is your site categories. It is how you would organize the content of your site. For eg: "How-to" , "Tips" etc on this site are Taxonomy vocabularies.
You need to add "terms" under each vocabulary. For more detailed discussion see this.
2. All the content on your site is a node. "page", "story", "book", everything is a node in drupal. You can attach nodes to Taxonomy terms to organize site's content.
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