Does using a hotspot while connected to wifi use cellular data? I'm confused about data usage / hotspot while connected to WiFi.

I'm asking because my Windows 8 laptop cannot recognize my friend's router, as in it can't even find it, however, my iPhone 4 can. I have connected using my iPhone 4 and turned on the "Personal Hotspot" feature.

Does this use my Data Allowance from Telstra, or will all internet/network traffic flow through to the router?

If the above answer is yes, what if I took out my SIM Card? Would it not work at all, or flow through to the router?
You cannot use your Wi-Fi connection for Internet connectivity while other devices are using Wi-Fi for Personal Hotspot. You can share only a cellular data connection; you cannot share a Wi-Fi connection.

As seen here: http://support.apple.com/kb/ht4517