Each company is different. We have 5 different levels here
- Blocker
- Critical
- Major
- Minor
- Trivial
For the most part our business testers define the severity of the issue. As they do the testing and the run across a bug they determine how this will impact the customer and the potential release and assign a priority accordingly. We review the items that are the most severe and see if they really are as severe as the business is making them out to be. Several times the business testers have reported "Blocker" bugs, but when we dig into it we find it's really not that critical.
To sum it up, Blocker bugs are the bugs we need to fix immediately. These are the bugs that will prevent the product from working if it were released in that state.
Critical bugs are still bugs, but there is typically a workaround or a quick fix that can be applied post-release.
Major bugs have a workaround and can be put off without impacting the functionality of the application.
Minor and Trivial issues are usually reserved for enhancements or "nice to haves".
Hope this helps clarify things.