At the core of the Virtual Computer, sits the Ethereum Virtual Machine (or EVM) that is in charge of "executing" transactions to alter the data stored in it. You can think of it as the operating system of a distributed computer. Among other things, it stores the ledger that keeps track of the ether balances of each account. Ether is the native currency of the Ethereum ecosystem. Smart contracts are the equivalent of apps running inside of the EVM. They can store data and have methods that can be invoked by users or other smart contracts. As these applications consume resources on the EVM (compute, storage...), they can only run if the caller supplies "gas", which is spent to cover the cost of these resources. Gas is paid in Ether.