Update: See my article on the new iPad's GPS, and its best navigation, travel, and location-aware apps.
Ever since Apple introduced the original iPad, there has been some confusion about its GPS capabilities. Based on the questions I receive and the comments I'm reading, people still want to nail down the facts on the location and GPS capabilities of the various iPad 2 models before they buy. Note that the links in this post provide more in-depth information about key terms and features.
The technical specs as listed by Apple provide a good starting point: The "Wi-Fi" versions of the iPad 2, which come in 16, 32, and 64GB-memory models, do not have built in GPS chips. One cause of confusion is the fact that the Wi-Fi models can determine your location fairly accurately, as long as they are within range of a Wi-Fi signal, thanks to their Wi-Fi positioning capability. The Wi-Fi models also have a built-in digital compass.
The iPad 2 Wi-Fi + 3G models do have built-in GPS chips that receive signals from the global GPS satellite system to determine your location - as closely as three meters, depending the the number of satellite signals the chip is receiving. GPS in the iPad 2 is classed as assisted GPS, also known as AGPS, which enhances the performance of standard GPS in devices connected to Wi-Fi or the cellular network. The iPad 2 W-Fi + 3G may be used for the full range of apps that require detailed location information wherever you may be on the planet, including mapping, driving, services locators, and more.
Updated: There have been claims that the iPad 2 Wi-Fi model, which does not have a GPS chip, will use the GPS feed from an iPhone 4 (with iOS 4.3 installed) tethered to it with Apple's new Personal Hotspot feature. This did not work in my tests, using apps that indicate when they have a GPS fix available, and other sources have concurred that the Personal Hotspot tether does not provide GPS data to the original iPad, or to the iPad 2.
I've also posted a more in-depth feature about GPS and location services and apps on the iPad 2. Image © Apple