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It's kinda difficult to explain, and I don't know everything about IP addresses, so this is the basics:
Your computer is given an IP address according to the area your Internet is being provided in. (And if you're using a laptop or other wireless device to connect to the Internet, it, of course, takes an IP address of the area you are currently in.) So using geolocating (I think that's what it's called, when you locate using IP address?), one can determine where you live from the numbers in your IP address. Because certain numbers relate to certain countries. By determining IP addresses, this is how a site can block a certain user, or even block an entire country. (You can, however, get around this by using proxy sites, but that's a different story.)
IP addresses are pretty much literally what it sounds like: an address for where you are currently using the Internet. Not only can they tell what country you are in, but sometimes they can tell what region of the country you are in, what your coordinates are for the globe, and what time it is where you are. (IP identifiers aren't always 100% correct, but they are extremely precise.)
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