If you have location history turned on, Google will track where you go.
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Google will also track your search in a bunch of different categories if you have Search History turned on.
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It was actually pretty interesting to see what ads I've clicked on.
Google can serve you interest-based ads because it has a bunch of data about you, including your age, gender, languages you speak, and what it thinks your interests are.
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Some of my interests were on-point, but others felt pretty random. Dictionaries and encyclopedias?
Google also keeps track of what devices you use and when you were last active on them.
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Wanna know how many emails you've ever sent or contacts you have? Google keeps track of that too.
Ditto with your Google Talk contacts and purchases through Google Wallet.