Known as "backlinks," inbound links to your site from another is a great way to gain Google's respect-o-meter called 'Page Rank.'
Page Rank is only part of Google's algorithm but it is a big one. Google decides how relevant your site is based on how many other sites link to yours using a certain keyword.
Lets think of it this way. You are away from home on a trip and you decide you want to find some good Italian food for dinner. So you ask 50 people, and of those 50, 35 tell you to go to "Luigi's on 5th". That restaurant has built up a very good reputation in that particular area. It would then be very likely that this is where you are going to have that night.
So lets go over this again. You asked around for good Italian food — You are Google polling the web for "good italian food" (keywords). You found 50 people (websites) who had an opinion and over half of them suggested (backlink) one place. Google is going to remember this, next time someone comes to town looking for good Italian food. Visitors now only need ask Google to find out what a majority of people think. So Google is kinda the Italian Dining broker in this example. They make a fantastic business out of pointing people in the right direction. And they want to make sure they do that as accurately as possible. So if 400,000 websites have a link that says "Good Italian Food" and that link takes you to luigis.com, where do you think Google will send people?
So that is the "why", the "how" is a bit more involved.
Trying to figure out who is coming to your web site and from where can be easily found by reading a traditional log file reader such as Webalizer, or AWStats. Gaining a fuller perspective of that incoming traffic can be had with javascript based stats tracking services such as Google Analytics. But both of these only record people who actually landed on your site. They will never pick up the dozen or so that are linked that no one follows. You might say well if no one follows them, why do I care. Well Google cares and does follow them, and the more links you have coming to your site using good keywords the better, regardless of whether or not any real humans follow them.
Sometimes instant gratification is good. Also finding a bargain in unexpected places is good too. There are a lot of ways to generate elaborate graphs and charts with some of the SEO software out there, but many violate Google's TOS and can be expensive. But there are quick, easy and free ways to determine many of this. This is where the power of all that mind boggling information Google has comes into play. And you may be surprised how easy it can be leveraged. Let's say you wanted to find out what sites were linked to yours. Sort of a 'who's been talking about me' search. Try looking for keywords that are relevant to your business then use the 'inanchor' operator. For example:
graphics inanchor:mloader
This will bring up all the sites that use the word 'mloader' in the link but also mentions the word 'graphics' in the rest of the content. Pretty cool huh? How about finding out who is linked to a particular page on your site? Check this out:
link:www.w3c.org
This example shows what pages are linked to the home page of the World Wide Web Consortium website. But you may notice this includes links that are within the W3C's site itself. No problem use a boolean like this:
link:www.w3c.org -site:w3c.org
These are great ways to find out who is linking to your site and with what keywords. Of course you could build up backlinks on your own site. Wanna target "Good Italian Food?" Write a page, and sprinkle these keywords throughout your site and link them all to that page. Now you could ask my Mom who makes the best Italian food and if she said she did or I did you may think she is biased. Google works the same way. If you think you have the best content for certaain keywords, Google will take it into consideration. But it's the people down the street and across town that really matter to Google. So try to get "Good Italian Food" linked up to your site from other sites to gain more Google respect.
Many people don't realize how powerful Google really is. It is probably the most powerful tool that has ever come out of the www age. Check out this link to get more info on advanced search operators.