Language packages

Master English pack
is primary source of all built-in texts in Moodle. It is distributed as a part of Moodle and plugins. It consists of PHP string files and HTML help files in the folder "en_utf8". All add-on plugins (modules, blocks, etc.) have to contain their own master English files. Master English pack can't be edited via lang.php.
Master language pack
is official translation of Master English pack. Usually, it is maintained by a voluntary member of the community. Master language packs for Moodle core can be updated automatically from admin menu under "Languages" (you will find a utility that allows you to select, download and install these language packs directly from within Moodle). They can also be downloaded manually from http://download.moodle.org.
Local modifications
of master language pack are stored in separate directory on your server. Therefore, you can update master language pack without overwriting your on-site customization.