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See also "USB GPS Receiver" and Wikipedia: How it works - simple introduction

A GPS receiver calculates its position by measuring the distance between itself and three or more GPS satellites. Measuring the time delay between transmission and reception of each GPS radio signal gives the distance to each satellite, since the signal travels at a known speed. The signals also carry information about the satellites' location. By determining the position of, and distance to, at least three satellites, the receiver can compute its position using trilateration. Receivers typically do not have perfectly accurate clocks and therefore track one or more additional satellites to correct the receiver's clock error.

From Ask OLPC a Question about Hardware

Question - Built-In GPS Unit? 
With GPS units becoming cheaper and cheaper, I see this $100 laptop as a great product if it had a built-in gps receiver. Even put a small switch to turn off the receiver when not in use to save battery. I know the machine has 3 usb ports and I could add a gps module, but having it already built-in just makes it that much cooler! What gps units have you seen that have generators attached to recharge the batteries - complete with wifi and a lcd screen - for less than $500-$600 USD? - And adding a gps module would would only marginally increase the current $138 USD.
The OLPC design includes GPS capability. It is called a USB port and there are 3 of them. They can be used for an astounding variety of peripherals. For instance, using a USB-Serial adapter one of the cheap GPS bricks will work with the OLPC. Or you could add a USB Bluetooth adapter and a cheap GPS brick that uses Bluetooth. I have a Nokia N70 telephone with Python and Bluetooth and I bought one of the cheap Bluetooth GPS bricks. After a few hours with Google and Python I was able to write a script to grab and save GPS locations over Bluetooth. I imagine it would be just as easy to do on the 2B1.

GPS as an (unpopulated) Optional

(Originally in USB peripherals)

GPS receivers with volume of about 1 cm^3 and a power consumption of less than 100mW (while continuously tracking!) are available today. These devices will provide a very high additional value for a small fraction of users.

Please evaluate the implications of reserving about 4 cm^2 PCB space for a through hole (not SMD) mountable GPS module (using bit-banged serial IO via general purpose IO pins, and the GPS module being not end-user mountable).

Note that the target users don't need GPS to know where they are. If GPS was needed for a classroom situation or for some school project (mapping the fields around the village) then the OLPC already supports GPS through USB. Either a GPS that emits NMEA through RS-232 connected to a USB-serial port or a Bluetooth GPS that talks to a USB-Bluetooth dongle.
USB ports are there for a VERY good reason
What do you mean "don't need GPS to know where they are" ? What is the typical cost of each type of USB GPS? (and please sign comments!) Sj 19:41, 13 July 2006 (EDT)
Call it $100 for USB enabled GPS units, less in bulk. But GPS can be used for a vast number of projects and issues, ranging from mapping and land surveys (not having to take anyone's word for where community property begins and ends!) through navigation and logistics. That said, I think this should be USB and not inside the device. We don't want some unfriendly government tracking these units -- or do we? GPS is a dual-use technology, after all, and I have had the thought that one of these kids laptops would make a dandy IED detonator. clarka 13 October 2006
A clarification - GPS technology receives and processes data to determine your location. It is not a transmitter of this information. Unless there was some other way to transmit the data received from the GPS chip there is no worry about unfriendly government tracking. I agree with the sentiment that the technology applies to a very small fraction of users today though GPS chips have become very low in price. - Jeremy 13:53, 8 November 2007

Useful Links

Key to get a Bluetooth based GPS receiver working, is first getting Bluetooth to work on the OLPC. Perhaps this link may help...