The name in
/etc/hostname is what your computer thinks it's called. That's often what is meant by hostname.
Computers connected to the Internet (including intranets) have names; more precisely, most Internet network interfaces have a name associated with their IP address. Internet nodes that are not routers generally have a single network interface worth consideration, and the name associated to this interface is called its fully qualified domain name (FQDN). The FQDN is the name you can use to designate your computer from any other Internet node (well, assuming there are no complex configurations involved). Generally, to keep confusion down, the FQDN is something like
foo is the host name.
When you have a single frame open, Emacs uses the value of the
system-name variable as the frame title. This variable is set to the FQDN when Emacs starts. You can change it from your
.emacs if you wish. This variable isn't used much, so don't worry about changing it. It is used to form a default email address when you send mail or news posts from within Emacs, but you'd almost always override that email address setting anyway.
The frame title format is determined by the
frame-title-format variable (unless overridden for a specific frame). You can change it if you'd like to use something other than
system-name when there is a single frame. For example, if you want to always see the buffer name in the frame title (as opposed to when there is only one Emacs frame), you can set it to