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Been wondering what is the difference between the meaning of these two words when it comes to Drupal, and it seems they are used interchangeably. Is that a correct understanding?

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Localization is about making your site "local". One of the tasks in doing so would be to translate the content, but you also could "translate" the urls, setup menus differently etc. The main part is the translation and the locale module is what handles that.

So in short, it's pretty much the same thing, but localization can cover a few things that translation does not.

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    Date format, currency, time zone, and decimal mark are a few things that would be considered localization that are pretty much unrelated to translation. – mpdonadio Jan 16 '12 at 22:30
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In Drupal, the terms "localize" and "translate" have special meaning (beyond the typical Internationalization/Localization meanings).

"translate" - this typically means that you end up with a "translation set" of objects. For example, an English source node with its German & French translated nodes (3 related objects). Or, a French source taxonomy term and its Spanish translated term (2 related objects).

"localize" - this typically means that you only have one "object" but can translate the textual information related to the object via string translation. For example, for a menu item, you have one English menu item but then translate the title of the menu item into Spanish (while both languages have the same link).

I've sorted this all out because I'm writing a book on Drupal 7 multilingual sites for Packt that will be out very soon: http://www.packtpub.com/drupal-7-multilingual-sites/book

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