Gauge describes the "tightness" or "looseness" of the stitches in a knitted piece and determines size. Gauge is typically expressed in number of stitches per inch (SPI) or stitches per four inches in pattern stitch. Yarn ball bands commonly include the suggested gauge and Needle size recommended to obtain it for that yarn. If the stitches are closely packed together (higher stitches per inch), the piece is said to have high gauge. Inversely, loosely packed stitches (lower stitches per inch) indicate low gauge.
Gauge is controlled primarily by the hand which is holding the working yarn, and varies between knitting methods. The English method, which has the working yarn manipulated with the right hand, typically has more even gauge than the Continental method, though the Combined method is said to be superior to both. Of course, there are no fixed rules. For example, in some cultures knitters control the working yarn by draping it around the neck.
Additionally, needle size and yarn weight directly affect gauge. Larger needles or bulkier yarn will result in larger stitches, meaning looser gauge; inversely, smaller needles or lighter yarn will result in tighter gauge.
When adjusting needle size or yarn weight to match a pattern, a knitter must consider the fabric the pattern is intended to produce. In general, yarn manufacturer gauge recommendations are for a typical sweater fabric. Going to a larger gauge will produce a lacier fabric, while a tighter gauge will make a stiffer fabric.
Controlling gauge to ensure consistency is one of the main challenges of a knitter. In particular, when creating fitted pieces gauge becomes extremely important, as the final dimensions of the piece will be directly affected by the gauge of the knitting. Therefore, it's important, when beginning a pattern, to create a Gauge swatch, lest the resulting piece be larger or smaller than expected.
Unfortunately, all that said, the gauge of even the best knitters varies from day to day, even hour to hour. As a result, Blocking is a vitally important final step, as it evens out gauge and gives the piece a more finished look.