What is the difference between an IP address and a physical address?

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Every network device has two types of addresses, one called the logical address -- in most cases this is the IP address -- and the other one being the physical address -- also known as the MAC address.

The IP address is an address bound to the network device, i.e., computer, via software. In a Windows-powered computer, the Windows operating system allows the user to configure the IP address the specific workstation will have. This IP address is used to allow all network aware programs, i.e., Internet Explorer, Netscape, Outlook, etc. to use this address when communicating with other hosts. The seventh layer in the OSI model has the IP addresses.

The MAC address is a hardware address, which means it is unique to the network card installed on your PC. No two devices on a local network should ever have the same MAC address. In the unlikely event this occurs, the two devices will have major communication problems. During the manufacturing process, the vendor "burns" a specific MAC address into each network card's ROM. When the serial numbers have all been used, they start from the beginning, as it's very unlikely anyone would buy two network cards from the same vendor, and they will contain the same MAC address.

So, to sum all that up, you should remember that a IP address is a logical address which is configured via the operating system, while the MAC address is a hardware address, burnt into the network card's ROM during the manufacturing process.