A nation is basically a collection of towns, which all generally help each other out in terms of resources, manpower, advice, and other things (Of course, that's not required within a nation, but it seems to be common, at least on noobstown). To see if you happen to be in a nation type "/town", without the quotes, in the chat and if your town, Jazz in this case, is part of a nation, there will be a line in the text that comes up that says something like "Nation: nationNameHere". If you do happen to be in a nation, and you want to know a little bit about your nation, simply type in "/nation". Also, if you are in a nation, you can switch into, and out of, nation chat in a similar manner as to town chat with "/nc".

Towns get invited to join Nations. There is no physical place for a nation. However, the towns within the nation can build nation related builds.

Yes. Oakvale is in the nation "Ethereal Draconia". The capital of that nation is DragonFire, the owner being DragonSoulSong.