Type 3 grammars generate regular languages. These are languages with features like begins with "xxx", contains "xxx", ends with "xxx", contains an odd number of y's, etc. Finite automata (deterministic or non) recognize these languages.
Type 2 grammars generate context-free languages. These are languages with features like some number of x's followed by fewer, or more, or equal number of y's, or where a word is followed by the same word, but reversed. Pushdown automata recognize these languages...think Finite automaton with a stack.
Type 1 grammars generate context-sensitive languages. These are so close to Type 0 grammars that it is often hard to find a difference between them. LBAs (linear bounded automatons) recognize these languages, think Turing machine with limited resources...think a modern computer.
Type 0 grammars generate Turing languages, sometimes called recursively enumerable languages. These are basically any language that you could write a computer program to recognize, but they really blend with Type 1, since real computers generally have some kind of memory limit.
Finite automata, and pushdown automata are very important in solving problems that arise when writing compilers. However, that isn't why you study them, you study them to learn the limits of what can/cannot be computed. Many programmers think you can solve any problem with a computer. Computability theory teaches you otherwise.
Edit by "Dude" - OK, here is an easy to understand (and famous) problem that cannot be solved by any Turing machine or computer or programmer or alien genius...
Imagine you have some dominoes...but instead of patterns of dots, you have some short word on the top and bottom, say words like "aba" and "cab". If I give you 5 or 10 or 50 of these dominoes, can you arrange them so that the words on top, all concatenated together, match exactly the concatenated words on the bottom. You can make as many copies as you like of each and any domino.
Example dominoes (contrived :) (a/aab), (aba/ac), (cab/ab) is a set of 3 dominoes where the tops (a+aba+cab) exactly equals the bottoms (aab+ac+ab).
As easy as this might sound, it cannot be solved in general.
BTW, when I first read/understood this problem...I was thinking....ooooh, n! is starting to look good!