It does. Using PGP in conjunction with a Yubikey means even if someone obtains your password repo, they still can't get in without your physical private key. Without using a Yubikey, an attacker would still need to obtain the private key. They couldn't just grab the vault from the cloud store and start running offline password cracking on it.

How do you encrypt using a hash function?...

While it can be done (use the secure hash to generate a key stream--but first google it because I bet there are some pitfalls to keep an eye on), I assume that the parent poster meant to indicate a symmetric encryption algorithm like AES (as opposed to asymmetric PGP), instead of a hash algorithm like SHA.