When it comes to the technology behind how altimeter watches work, you are limited to essentially two choices - those that calculate altitude by GPS and those that use barometric pressure.
I'll discuss the specifics of each type of altimeter watch in the next few paragraphs. To summarize the difference between the two, GPS altimeter watches use map datum based on position (this position is communicated to a satellite). The majority of barometric altimeter watches use air pressure to determine altitude. This is the original method (by original, the initially discovered method) and the most common method for a watch to determine elevation.
If your altimeter watch is GPS enabled, the way it calculates altitude is by sending your latitude and longitude to a satellite, which likely communicates with the manufacturer and returns your altitude, among a number of other data points. Because of this GPS altimeter watches are considered to be more accurate that their barometric watch counterparts. Not having to recalibrate is one of the obvious benefits to owning a GPS enabled altimeter watch. However, one of the downsides is your position and altitude is often subject to terrain - on flat, open terrain you will have near perfect communication with the satellite. However, in mountainous terrain, particularly in a canyon or gorge, you will often have poor satellite signal, resulting in inaccurate latitude and longitude positioning. Obviously, this results in somewhat questionable accuracy of your elevation. Examples of GPS enable altimeter watches are the Forerunner 305 or the Suunto X10.
Most altimeter watches using barometric pressure have a built in software component that uses the watch barometer to calculate altitude. While the exact function that the watch uses to determine altitude is beyond the scope of this article, it is important to remember that barometric pressure changes rapidly as weather changes. Because of this, during outdoor activity it is important to use known positions to calculate altitude and recalibrate your watch if necessary. While there are literally hundreds of watches out there using barometric pressure to calculate altitude, some of the more popular brands are HighGear, St.Moritz, and Suunto.
The entry price point for GPS enabled altimeter watches is around $250. While a bit more expensive than the barometric pressure altimeter watch (lowest price of around $100) often GPS altimeter watches come with many features, such as trip distance, not in their barometric counterparts. When looking for a watch compare carefully the individual watch feature set that best matches your needs.