The "Production" version is for your live website, because it has been minified and compressed to take up the least amount of space, which is important for your visitors, whose browser will have to download the jQuery file along with the rest of your website. For testing and development, the "Development" version is best. It hasn't been minified or compressed, so when you run into an error, you can actually see where in jQuery it happens.
You can use jQuery from a CDN just like you would do with the downloaded version, only the URL changes. For instance, to include jQuery 1.5.1 from Google, you would write the following:
Or if you prefer to use it from Microsoft:
Read on to learn how to start using jQuery.