The clarity of a diamond is a reference to the existence of any flaws in the diamond. Diamonds may have flaws either in their interior (inlcusions) or on their surface (blemishes).
When diamonds are graded for clarity, the term "blemish" isn't used. All flaws, inclusions and blemishes alike, are referred to as inclusions for simplicity sake.
The Diamond Clarity Grades
Diamonds are graded for clarity using the jewelers' 10x loupe. Grades range from "F", Flawless to "I" Included, with Included grades raning from 1 to 3. "Flawless", obviously is for diamonds without inclusions (or blemishes) of any sort. "Included 3" diamonds would have blemishes and/or inclusions that are visible to the naked eye.
A more complete profile is shown below:
Flawless: No internal or external flaws. Extremely rare.
Internally Flawless: no internal flaws, but some surface flaws. Very rare.
Very Very Slightly Included (two grades). Minute inclusions very difficult to detect under 10x magnification by a trained gemologist.
Very Slightly Included (two grades). Minute inclusions seen only with difficulty under 10x magnification.
(two grades). Minute inclusions more easily detected under 10x magnification.
How Clarity Effects Diamond Value
Grades from VVS1-VVS2 to F are quite rare and therefore command a greater value. SI1-SI2 and VS1-VS2 are often beautiful daimonds, depending on color and cut, etc. Diamonds in this grade do not show flaws except under rigorous examination.
Diamonds from SI1-SI2 up to F grades are investment quality diamonds. They will, naturally, be more expensive.
When cut well, SI1-SI2 diamonds exhibit nearly the same fire and brilliance of higher graded diamonds. Lesser graded diamonds, those with more inclusions, may limit the free movement of light within the diamond, causing a lack of brilliance and fire.