Product Type must be one of the following

• Storable Product (you track stock)
  
• Consumable (you can buy it and receive it, but you don't track stock)
• Service 
  

• Booking Fees
• Combo
• Event Ticket

Product Category is used in several different ways to further categorize products and services, but you have complete freedom to define these. 

You can use Product Categories:

• to set costing methods and control postings (if you install Accounting)
• for pricing
• for reporting