What does "consolidating library" actually do?

Why would I need to do it and does it take up extra space on my hard drive?
Thanks

+"when you say makes a copy to your itunes folder does that mean to the folder that you dsignate in you preferances?"+
Yes, exactly.
+"here is my problem, most of my music is on my external hdd but everything that i am buying today and importing today it is putting in the username/music/itunes folder"+
New music that you import, or purchase from the iTunes Store, goes into the designated folder, without regard to where the rest of your music is.
+"i want it to go in the folder that has the rest of my music, the folder set in the preferances part is the username/music/itunes but itunes does see the music i have in the other folder. should i just change the folder in my preferances to where i want the music to go and consolidate it all to there?"+
Changing the folder in preferences affects future activity, but does not move anything that is already in place. It sounds like Consolidate is what you want. Make sure you read the link provided by Zevoneer so that you fully understand it; it takes a while to run and has no Undo.

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