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That's how Google maps gets real-time traffic info, by monitoring the movements of phones using it.

How would it know if you're walking or driving?

any number of heuristics.

average speed, location (are you in the middle of a park, or traveling 65MPH very near to a highway?), ambient noise,etc

Android phones have a "car mode" with a simple, big button and voice interface that is safer to use when driving.