The Windows Team Blog have a good post on understanding Windows 7 Libraries, which allow you to groups of files more efficiently (such as Music, Photos and Documents):
You can read the full blog post here.To better understand the concept of Libraries in Windows 7, we need to look back to the time before Windows 7. Earlier version of Windows like Windows Vista and XP, included sets of special folders for storing user’s content such as “My Documents” and “My Pictures.” In Windows Vista, these special folders where automatically indexed to allow users to perform faster more efficient searches on their content. Even so, many users, me included, store their files, music, and pictures all over the PC in various folders like c:\temp, d:\Birthday2008\pictures, or even in remote storage. We refer to this as storing data outside the user’s profile storage space. This affects the indexing and therefore the entire search experience, and often sends the user on a small quest to try to find their content.
So, in Windows 7, Libraries tries to address the problem of users' content stored all over the PC by allowing users to have full control over their “Documents Library” folder structure. Meaning that in Windows 7, users can define which folders to include in the Documents Library. This is true for any Library. Therefore, we can say that Libraries are user-defined collections of content. By including folders in Libraries, the user is telling Windows where his important data is located. The system will index folders, to enable fast searching and stacking based on file properties.