A town is a village or hamlet that has grown. In Imperialism and Imperialism 2 towns produce materials and/or goods independently of the capital but send them through the normal transport system. The two games have slightly different formulae.
National and tribal capitals are towns from the start. New towns result from upgrading by a builder after you research National Bureaucracy. Each town produces a free material for every complete four units of the base resource produced by its province (e.g. one lumber for every four timber, or one bronze for every two coal plus two iron ore). If you capture such a province you get the benefit even if you have not researched National Bureaucracy.