If you add a zip file with , it can be unzipped automatically for you. If, however, you unticked the box asking for unzipping it will just be stored as a file like any other.

However, you can use

 

unzip

(on the menu) to explicitly unpack the folders and files within a zip file. You can choose to delete the zip file afterwards or keep it alongside or in the folder of contents it creates.

It's a single file which stores multiple other files and folders. Primarily used for compression, it's also a very handy way of moving lots of files around as one item. Wikipedia has more.

There are numerous utilities for packing files into a zip file and Windows XP, Vista and Windows 7 all have this built in, though with slightly different ways of getting at it.