It's a circuit tester. Plug it into any standard 110 volt receptacle and it analyzes the electrical cicuit that it's wired to.
As to its importance.... I'd guess that if the receptacle is wired incorrectly it could be hazardous to certain tools. If the hot and ground wires are backwards, it seems possible that a router could spin backwards.... causing an unpredictable feed. It is also possible that a person could become a part of the circuit by creating a ground for the power.... Most everyone has heard of an electrician nic-named Sparky, neh?
Of course it also could prevent an electrical fire that might burn all of a woodworkers prized possesions.