We recently changed the way location editing works in your profile ( http://www.etsy.com/your/profile ). We found that the old way was confusing and error-prone, so now, when editing your profile, you can just start typing your location in the "City" field and select one of the suggestions we provide! These suggested locations are based on what you start to type, as well as where you (or your computer at any rate) currently are.
Selecting a location from the list (or updating it if you've done so in the past!) is important because having a properly formatted location lets us provide better local search for Etsy items and Sellers that are near you.