The inner padding refers to the distance between the text or image and the virtual or real frame/edge of the block in question.
The outer margin refers to the distance between the virtual/real edge of the block and the actual limit of the block. In contrast to the inner padding, colour is not carried over into the outer margin.
The best way to make the difference clear is to set parameters for the inner padding and outer margin, as well as for the block frame/edge.