What's the difference between Terminal in Ubuntu desktop (Applications>Accessories>Terminal) and xterm? They look very similar.
They are similar because both are terminal emulators.
There is a question and answer at askubuntu.com explaining why terminals need to be emulated and what a "real" terminal or a "virtual" terminal is.
Do not confuse a terminal with a shell. There is a question and answer at unix.stackexchange.com explaining the difference between a terminal and a shell.