The iPhone is pretty smart and it uses Location Services to determine where it is. It does this in 3 ways:
1. Using GPS
2. Using cell tower triangulation which is guessing where it is based on the strength of the nearest cellphone tower
3. WI-Fi location where the wi-fi location is known.
If you need to conserve battery, you should turn this off.
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location services are great for photos too. if you have location services turned on, when you do your camera roll, you can select places and see the locations photos were taken.