It identifies a computer in a network, just like your home address identifies your apartment in a city.
No, it does not reveal the exact physical location (at least for the usual consumer network). The reason it can approximate it is that just like home addresses, IP addresses are layered. An ISP might request a “block” of addresses from another larger provider, which it can then lease to customers. Since one ISP usually operates in a specific area, knowing which block belongs to whom lets you approximate.
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