From what I've been able to gather from the rules, Wounds represent a static number. After taking damage in excess of your Wounds you begin to take critical damage and consult the damage charts based on the damage type.

In which case, when an ability says something like 'restores 1d5 wounds', what exactly does that mean?

Apologies, I'm sure this question has been posted before but I didn't find it in the search.

Wounds are a fancy word for hit points, life energy or whatever else you'd like. You lose wounds when you get hit, so restoring them makes that damage dissappear.