How do Colleges Determine you Grades?

i seen people getting a 3.8 or a 4.0 GPA. what do these numbers represens? is it based on numeral test grades, like getting a 98 on midterms or is it based on teachers' impression (a.k.a cl participation in high schools)? is there honors courses in college? also, is it possible to get over a 4.0 GPA?