According to the SCS Gearbox website, there are three types of boat speedometers in common use: one that uses global satellite positioning, or GPS, to measure speed; one that uses water pressure and velocity; and one in which an impeller is employed to gauge speed. Of the three methods used to measure a boat's speed, the GPS method is the most accurate.
A boat speedometer can use an impeller beneath the ship to measure speed, in the same way an anemometer measures wind speed. As the boat moves faster, the impeller spins faster, indicating the vessel's speed. Another type of boat speedometer uses a tube within the hull to measure the velocity and pressure of the water as the boat moves and uses this information to calculate speed, according to HowStuffWorks. The GPS boat speedometer sends periodic signals to orbiting satellites to obtain the most accurate indications of the speed of a boat.
In the times before modern boat speedometers, a length of rope, tied in knots which were a specific distance apart, was dropped into the water. The number of knots passing by over a given time frame was used to calculate a surprisingly accurate estimate of a vessel's speed. This method of navigation was often referred to as dead reckoning, and it was the primary means of nautical speed measurement prior to the advent of modern instruments.