What are external entities and notations in DTD?

I have been reading about these topics in W3C Recommendation and Wikipedia. I am not sure if I have fully understood them. Could someone explain clearly to me what external entities and notations are in DTD? What are their uses exactly?

Here are some examples of external entity declarations:

<!ENTITY open-hatch SYSTEM    
         "http://ift.tt/1q45wiX">
<!ENTITY open-hatch PUBLIC 
         "-//Textuality//TEXT Standard open-hatch boilerplate//EN"
         "http://ift.tt/1q45wiX">
<!ENTITY hatch-pic SYSTEM 
         "../grafix/OpenHatch.gif"
         NDATA gif >

Correct me if I am wrong. A general, internal entity replaces the entity name (&ent;) in the document body with the string declared. Does an external entity replaces the entity name with the entire content of an external document?