codePool is a Tag which you have to specify when registering a new module in app/etc/modules/MERG_Module.xml
In Magento, 3 types of codePool.
All are resided at app/code/ directory.
core codePool, generally used by Magento core team. community used by third party extensions. And local codePlool should be used for in-hour module development and overriding of core and community modules for custom requirement.
So, codePool, used in Magento for locate module in app/code/ for processing data code.
core CodePool : app/code/core/
community CodePool : app/code/community/
local CodePool : app/code/local/
In sort, using codePool Magento can understand where to Find Files for that extensions/modules.