You have an internal hard drive in your computer which is 40GB in size.
An external hard drive is exactly as it sounds, an additional hard drive that you plug into a USB socket (normally) to enable you to increase the storage available to you without having to replace the internal hard drive
If you were to get an external hard drive you could move your music, films, pictures, documents etc onto the external drive and the space would be freed up on your internal drive.
If you were to do this you would (obviously) only be able to access the files on the external drive when it's plugged in. You also can only really store your personal files on an external drive, you should not install software onto the external drive (you can do it, but it's a really bad idea)