It will stop people from entering your instance.
It will stop you entering an instance with them in it.
I'm unsure of friends list Vs block list priority, sorry.
Also, yeah, it's a decent idea, I have slowly blocked players who interdict and kill without any comms. They can play with themselves. I've also blocked a lot of combat loggers, both of these player types don't serve to make the galaxy an interesting internally consistent sci fi setting.
I'm a pirate though, so I've probably been blocked a few times myself, as some folk don't even appreciate the more valid (in my opinion) forms of in game confrontation.
I would say, try to be sure they are gankers, don't assume the million plasma FDL is, until they actually act like nuggets.