Hi Pete
Folks are able to see everything you shared with them. Those things you didn't share are not reachable for anyome but you (and probably the FBI)
Dropbox is actually a Cloud storage. This means your Data is stored on a Server of Dropbox and this Server is (should be) online permanently.
The folder on your Computer is an exact copy of the folder on the Server. And if you change something in your folder, the folder on the Server will aslo be changed.
Cheers Florian