It is also relevant (penalties) in the game if you are trying to complete levels and clear races.

Like thunder says, the penalties are there to keep you from cutting corners to gain time, or bumping into rails or other cars to clear turns at high speeds, again to gain time. It also prevents you from running opponents off the track instead of properly overtaking them. Where the artificial intelligence (AI) failed in GT Prologue, was that it penalized unfairly, consistently.

For example, if I'm behind an AI controlled car, coming up to a hard right hand turn, and try to pass by braking late and overtaking to the right towards the inside of the turn. The computer controlled car will follow it's preprogramed line and drive right into me at the apex. But I get penalized and can't accelerate for 5 seconds. The same thing will happen in straights. While passing multiple cars in a row, if one of those cars decides to swing out and hits you, you get a 5 sec penalty. But if, while racing, you see a car in front of you lose control and run off the track, or bump another; they (AI) will not be penalized!
In the end it was just a very annoying glitch that proved to be very frustrating when trying to clear certain races.

From what I read online, Polyphony Digital has tried to address the issue in GT5, but at the time nobody that wrote reviews had gotten far enough into the game to really test it properly.

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