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An image could be a photo or graphic within your artwork or it could be complete artwork, images can be either vector graphics or raster graphics. Which type you use depends on what part of your artwork you are using it on.

What is a raster image? 
Raster images are made up of dots called pixels, each pixel is assigned a colour value. Raster images are resolution dependent so if you enlarge a raster image it will result in a loss of quality called pixelation which can make the image appear blurred, on the other hand reducing a raster image will have the opposite effect with the image looking sharper, as a general rule the higher the pixels and dpi of the image the better the quality will be. 
Raster editors such as Photoshop are great for photographs as well as for adding effects, shadows and textures to designs, it can also be used to create entire artwork, however for small artistic text, paragraph text, logos and certain graphics, vector is the best option. 


popular raster formats
JPEG
TIFF
BITMAP


image showing pixelation from low resolution image being enlarged

photoshop tip:
If you are using PS to create your entire artwork, make sure that your canvas size matches the size of the product and that the resolution is set to at least 300dpi or 600dpi if small text is used. This needs to be done to a blank canvas before you add anything to it.

image showing pixelation from bitmap logo enlarged

What is a Vector image?
Vector images are made up of points, lines and curves. Unlike raster images, vectors are not resolution dependent so images can be scaled up or down in size without loss of quality. Vectors are created in applications such as Adobe Illustrator, Corel Draw and Indesign. Vector format is perfect for a logo.


popular vector formats
AI
CDR
INDD


image of vector logo being enlarged with no pixelation