In terms of the GAE SDK updating, the production environment is updated automatically by Google. That is to say whenever a new version being released, the production version will be updated to that new version. So you never need to worry about the version being running in production environment.
Regarding the local testing environment, some manual task is needed to update the version. As @splix asked what language you are actually using, the process may vary a bit. In my case as a Java developer, we are here using Maven plugin to handle all this stuff. So essentially what you need to do is update your pom.xml to point to the right version of GAE, and run mvn gae:unpack, all latest version will be downloaded and used by your local environment.
This process is also pretty handy in Eclipse plugin, as basically what you need to do is update the Google Plugin for Eclipse as what you had done to install it. And after that, the local environment will pick up the latest version it got.
I am not a Python guy, so if you are after Python, my above answer my not be helpful. Sorry about that.