The NAV button sets the autopilot to fly a preloaded flightplan.
eg. Set up a flight from EGLL (Heathrow) To EGPP (Liverpool) in the flightplanner as a IFR flight VOR-VOR  Low Level. This will be programmed into the GPS. In the auto pilot set your cruisng height and speed. Shortly after takeoff  Switch the NAV/GPS switch over to GPS put Set Autothrottles /altitude hold and hit the NAV button and the aircraft will fly the flight plan in the GPS..

Hope thats helped
eno

Thanks, now I finally understand what it does - I was confused as to how the two different modes functioned.

Just to clarify....the "GPS/NAV" button is what's known as a Slaving Switch. 
This is how it would be used in a real aircraft:

-After takeoff in most large or jet aircraft the autopilot is usually engaged immediately after leaving the runway.
-If my first "fix" is a GPS waypoint I would want this switch in "GPS" so that the autopilot's HEADING function is SLAVED  to the GPS.
-Basically put: the autopilot is now using the GPS as a navigation reference.
-If my first ATC instruction is to join a radial from a VOR, I want my switch in the "Nav" position. This will slave the autopilot to the VOR.
All navigation in FS can be done  solely with the GPS and usually is. The one big hangup and a very common mistake I've noticed in simulated AND real airplanes comes when it's time to attempt an ILS approach. The ILS uses a VHF frequency and is received on the NAV not the GPS. If this switch is not selected to NAV and is left in GPS, the course indicator will remain centered and the Autopilot will fly the aircraft perfectly well over the center of the airport without ever descending to land!!