There are three kinds of entities. If the entity definition is an EntityValue, the defined entity is called an internal entity. There is no separate physical storage object, and the content of the entity is given in the declaration. Internal Entities allow for entities to be defined in DTDs so they can be used throughout the rest of the document. Internal entities allow you to define shortcuts for frequently typed text or text that is expected to change, such as the revision status of a document.
Internal entities help avoiding misspellings and retyping of the same information.
An internal entity is a parsed entity. If the entity is not internal, it is an external entity. External entity references is used for replacement text that is really long. The information is then kept in another file. External entities allow an XML document to refer to an external file.