Yes you can use a 32 or even 64 GB micro SD card. The 16 GB of internal storage will actually be around 12 GB, as the OS needs some space for itself to run. Remember, this is STORAGE, not RAM.
In PC-terms, the '1GB ram' is the system memory. The '16GB internal storage' is the hard drive (c: drive if you like) and any SDCard you add is like adding another internal hard drive, or an external USB drive.
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