When you install Picasa, it scans your hard drive for folders containing image files and displays your photos from these folders. These folders, along with the albums you create, make up the organization of your photos.
Folders in Picasa represent actual folders on your computer's hard drive that contain photos. Changes you make to folders in Picasa affect the corresponding folders on your computer's hard drive. For example, deleting a photo from a folder also deletes the photo from your hard drive.
Albums, unlike folders, exist only in Picasa. You can create an album that contains combinations of photos from multiple folders. For example, you might create an album called 'Pictures with Grandma,' and include photos featuring Grandma housed in different folders. Unlike Picasa folders, your albums don't correspond to real folders on your hard drive. When you delete or move photos from an album, the original files remain in their original locations on your hard drive.