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Natural Language Processing (NLP) is a vital subfield of Artificial Intelligence that enables interaction between computers and humans using natural language. It consists of two primary components: Natural Language Understanding (NLU), which involves comprehending language, and Natural Language Generation (NLG), which converts data into human language. Despite its applications in areas like chatbots and sentiment analysis, NLP faces challenges such as ambiguity and sarcasm, necessitating the use of libraries like NLTK and spaCy to aid implementation.