The Pi essentially has three software layers: the closed source GPU boot process; the boot loader, also known as the firmware; and the operating system. As of writing this book, we cannot update the GPU code. But maybe one day, Broadcom or hardware hackers will tell us how to do this.
This leaves us with the firmware and operating system packages. Broadcom releases regular updates for the firmware as precompiled binaries to the Raspberry Pi foundation, who then release it to the public. The foundation and other community members work on Raspbian and release updates via the aptitude repository; this is where we get all our wonderful applications from.
In this early stage of development, it is essential to keep both the firmware and packages up to date so that you can benefit from bug fixes and new or improved functionality from the Broadcom chip.