link exchange is that you post a link on other people's website or blog, and he also will post a link to your site for that, but it seems it is better to do that if the PR is high.
Link exchange is very important and you should carefully choose anchor words in your link. For example if i had no links and someone types in my keywords "dog clothes" then my site, pawpoint, will shout "Its me!" If i have 600 links from exchanges then 600 other sites will shout "Its Pawpoint!" and Google will follow the shouts. Get it?
Link exchange will help your site to get quality backlinks, you can request link exchange within your site niche that have a high pr and a good quality of a site.
Please search in Google. These are very basics questions, also there are several similar topics in this forum, you could have use search option. What you are doing is to increase your post count.
To improve the PR of the site we opt this technique like if your site's PR is not good then you post the link on high PR site's home page but relevant site's page and reciprocally you allowed that site to post its link on your site's home page. As google gives the importance to relevancy so if you are going for link exchange technique then the site with you want to exchange the link should be relevant.