Clarity is a measure of a diamond's imperfections. More to the point, clarity measures a diamond's lack of imperfections. There are two types of imperfections: inclusions and blemishes. Inclusions are internal imperfections, while blemishes are located on the stone's surface.
Inclusions occur at the time of a diamond's geological formation. Because diamonds are formed by massive heat and pressure, sometimes small crystals will be lodged inside them. This is a common inclusion. Additionally, an irregular atomic structure can sometimes cause streaks (known as graining) and create inclusions.
Blemishes occur after the formation of the diamond. Errors in the manufacturing process typically cause these and can be nicks, scratches, chips, etc.
Some inclusions are visible to the naked eye, and some are not. Diamonds free of inclusions are very rare and, as a result, are more scarce and valuable. Therefore, diamonds with the fewest and least visible inclusions tend to have the highest value.