Encoding rates (AKA bitrates or data rates) refers to the amount of data used to represent one second of audio/video. The more data you use, the higher the bitrate and the better the quality of the output - at least with the same codec.
For MP3, 128K used to be the 'standard' for internet downloading. It used to be called 'CD-quality' though it's definitely worse than a CD. Nowadays most people use 160K-192K which can be considered CD-quality, if the right encoders are used. Audiophiles, however, won't settle for less than 320K, though at bitrates that high, you'd need high-end equipment and highly trained ears to hear much of a difference.
There are other, more advanced codecs out there which provide the same quality at reduced bitrates, such as OGG Vorbis, Windows Media Audio and MPEG4 Advanced Audio Coding. Those codecs typically provide about a 30-50% improvement in quality, bit-for-bit over MP3, so a 128K AAC file, for example, can deliver the same quality as a 160K MP3.
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