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Yes it does.
Can't you just use Time Machine?
Yes, but if your HD takes a dump, you'll have to start from scratch, reinstall OSX, then initiate a recover from you Time Machine partition(assuming you have a new HD, or your old one was still ok)
If you made a disc image using Carbon Copy Cloner, you can run you system directly off of your external HD if you had to be back up and running that instant (it'll run a little slow if your external HD is USB). You could also just swap your busted HD with your backup HD and just go on from there. (this work fine if you have a MacBook or a MacPro, but you'll void your warranty if you swap out your HD in an iMac or a Mac Mini).