That's up to you, it will work either way. It's just a question about where on your computer you would like the files to end up: in the old location or in a new location of your choosing.
In most cases, I would choose New Location <a location on my current computer> and "Restore folder tree hierarchy" while restoring from an external hard disk.
The choice of original vs new location depends upon where you want to save/store your media resulting from catalog restore. Following guidelines can be used to decide which option to choose-
Original location - Choose this option if you want your media to get stored at the 'same' location as that in your previous catalog (which you backed up).
New location - If you want to store your media at another (new) location than that your previous catalog.
New Location with 'Restore folder tree hierarchy' - If you want to store your media at another (new) location with the folder hierarchy remaining intact.
There may be other criteria for the choice between 'original' or 'custom' location.
Most organizer users don't have a clear view of where the catalog is stored even if they generally know where the picture files are stored on their computer (you find it in the help menu, option system info.)
By default and depending on the OS version, the catalog (the folder containing the database and its associated files and subfolders) is stored in an hidden folder. I am sure that avoids a host of dramatic fiddlings from not so competent users ; but in many cases it's very useful to know and understand how to find, duplicate or move catalogs.
In our situation : backup and restore, the Organizer way is to save both the catalog and the picture files in a proprietary format in a backup folder. That backup folder should only been accessed by the Organizer.
If you want to restore on the same location because there has been something wrong on your drive and you want to come back to a previous situation, the restore to the original location is ideal.
Another frequent and different situation is when you upgrade to a new computer, OS, PSE version, change a drive... In that case, you have to restore the catalog, the picture files... and you have to update the database because the links in the database to the new real path is no longer valid. The restore function will do it for you, depending on your choice.
For instance, if you want to restore your catalog and pictures to an external USB drive to be able to share everything with another computer simply by plugging the USB drive, no problem. The picture folder tree will be restored, and the folder containing the catalog (database) will be restored in the new computer.
If you want to move your PSE10 catalog and pictures from an XP computer to a Win7 one with PSE11, no problem. The restore process will restore everything and prompt you to convert the catalog to the new PSE11 format.
While this is not stated in the help files is that it's easy to copy or move the catalog (database) anywhere just by copying the catalog folder. The catalog (now in custom location) can be opened by double clicking on the 'catalog.psexxdb'.
It's particularly important to know where the catalog is situated if you are using an external backup system.
Besides the fact that catalog folders are often 'hidden' by default, you have to be careful with 'permissions' : the 'custom' location should be accessible to all your users, both the catalog location and the pictures folder tree.