Good question. I think if you check that box, iTunes will not need to locate the file to play it. I made a mistake and imported my entire library with that box unchecked and now every time I try to play a track in iTunes library, it gives an error message because my library is stored in an external hard drive, and that's where I imported my tracks from. Since the external drive is not always connected to my PC, iTunes will not play them. In other words, it will play them only when the external hard drive is connected because iTunes is configured to play them from their source.
What I am not clear about is that if you check that box, does iTunes move the tracks to "media folder" on my computer or does it store them in some sort of cloud drive "media folder". I would like to get an answer on that. I wouldn't want them copied to my hard drive because that would take up too much space (which is why I store them on external hard drive). It would be great if iTunes stores them in a cloud drive (like Amazon Music Library). If not, I guess I will continue to connect my external drive to my PC every time I want to play the tracks in iTunes.