Rails - Oct 2006 - Production and Development databases

I am configuring the databases on a webhosting now, getting confused by 
production, development and test databases. What do we have to do for 
them? creating three different databases for them? and what are their 
differences please?
Thx

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http://glu.ttono.us/articles/2006/05/22/guide-environments-in-rails-1-1


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