Absolute:
Saving files with full path names means the entire directory path will be duplicated on the backup device.  ie: Dragging in /me/IconCity will cause a me directory to be built on the backup device with only the directory IconCity under it.  All files and directories under Icon City will be backed up.

Relative
Saving the files without full pathnames means that the folder dragged in will be the top one created in the backup folder.   ie: Dragging in /me/IconCity will cause the directory IconCity to be built on the backup device without the /me path information.

Either way,  only files in the directory dragged in will be backed up.