Geodetic Latitude
(Note: The elliptical shape of the Earth is exaggerated in this image with respect to what occurs in reality.)
If one were to take a cross section of the Earth one would discover that the Earth actually has a slightly elliptical shape instead of a circular one. This elliptical shape (called the "reference ellipsoid" in the geodetic system) is the result of centrifugal forces created by the Earth's rotation, and means that the Earth is not a sphere, but rather a (oblate) spheroid.
One consequence is that the "up" direction of a place on the Earth is slightly skewed with respect to the Earth's center. If one were to follow the line defined by this "up" direction inwards into the Earth, one would find that instead of passing directly through the Earth's center, it would pass slightly farther away.
A common misconception is that all points on the Earth that share the same latitude form a circle, or disc, referred to as the "circle of latitude". It is as if one could simply take a slice out of the Earth and end up with two circular cross sections. Looking at a two dimensional map of the Earth (using, for instance, a Mercator projection) seems to confirm this, as the positions on the Earth with the same latitude seem to not be affected in any way by elevation.
In fact, if one were to make this cut one would find that it would pass through (i.e. intersect) the "up" direction, with some locations appearing on the upper half, and others on the lower half. On the chart this is expressed using the blue vector labeled "Altitude". By making the cut through the circle of latitude, one cause the blue, "elevated" locations to appear on the upper half, and the dashed, "interior" locations to appear on the lower half. This, despite both sets of locations having the same "up" direction.
Further, if one were to draw a line from a point on the Earth's surface to the center of the Earth, one would find that the line does not conform to the line determined by the surface's normal. These are actually two different methods of determining latitude: one called "geocentric" latitude and the other called "geodetic" latitude. (There are, in addition, several more types of latitude.) "Geocentric" latitude corresponds to the former, where the line goes through the center of the Earth; and "geodetic" latitude corresponds to the latter, where the line is parallel to the normal.
Of course, geodetic latitude is not a hundred percent correct with respect to elevation either, as local differences in the density of the Earth's crust form small gravitational anomalies that affect what is considered "up" at any given location. The true model of the Earth's surface which takes these anomalies into account is called the "geoid", and is much more complicated than the reference ellipsoid.
In fact, the difference between the reference ellipsoid of the geodetic system and the true geoid can be observed while traveling along one of the Earth's oceans, and comparing actual elevations (i.e. sea-level) with readings from a Global Positioning System (GPS) device that uses the geodetic system. The difference can often be measured in meters.