A dialog box will open up asking for the path to the file to be linked. If you select this button, you can look through the hard drive and find the file you want your link to reach. I think of this as teaching the computer the path to the file. For example, you might want a link from your home page to Jeff's page. Once this link is set up, the browser will always look in the same spot for the file, which is why links break when files are moved.
Links only work when clicked on in the browser.
To actually use the web site links, the students must get out of the design software and go into the browser. Making a web site is a constant dance between the creation process in the web design software and checking the use of the documents in the browser. This means that you usually have both programs open and up on your desktop at the same time. When you open your browser, it automatically looks for a connection to the internet. If it can't find one, it returns an error message saying that it was unable to connect to a network socket.