To give some numbers: Youtube encodes as described above. All of these are rates of data per second, and the higher the better. They are all compressed though - and as such will sound worse than uncompressed (usually CD) audio - much like a compressed image will get artifacts.

• At 60kbps anyone should be able to tell the quality is terrible, regardless of equipment. Especially compared to a better source.
• At 128kbps it's still noticeable on most equipment. (This used to be the standard for MP3s on filesharing sites, but it's since moved to 192kbps or 320kpbs, since the files are so small anyhow).
• At 152kbps it's better, but not really good. Still below what you'd normally get on the Pirate Bay.
• At the max for mp3's, 320kbps, the quality difference to CDs is ~indistinguishable with a normal headset, but noticeable on good equipment.

In short: Even at it's best a Youtube download will have noticeably worse quality than what you'd get off iTunes/ThePirateBay, much less a CD. Youtube doesn't even max out the the audio codec it uses.

(You can listen to just how much of the audio is clipped off by compression here: http://soundcloud.com/mp3-losses/sets/mp3-losses-experiment/ )