With path variables you can define commonly used paths in a central location so that you don't need to change every source file's path each time you move the project or change the folder structure. For example, if you keep all of your application's source files in various subfolders of C:\Work\Files, you could create one variable that points to Files: <MyFiles>.

If you wanted to add a source file to your project that is in C:\Work\Files\Images, you enter <MyFiles>\Images. If you decide to move your source files to D:\Work\Files, you can go to one place, your variable <MyFiles>, and change the folder that it points to.

Path variables are used during the development of your setup project. These paths do not apply to the target machines where the application is being installed. Rather, they are used to link to source files for your setup project. When the project is built, those links are evaluated and the files they point to will be built into the setup.