Lua is a lexically scoped language. The scope of variables begins at the first statement after their declaration and lasts until the end of the innermost block that includes the declaration. Consider the following example: 

     x = 10                -- global variable
     do                    -- new block
       local x = x         -- new 'x', with value 10
       print(x)            --> 10
       x = x+1
       do                  -- another block
         local x = x+1     -- another 'x'
         print(x)          --> 12
       end
       print(x)            --> 11
     end
     print(x)              --> 10  (the global one)

Notice that, in a declaration like local x = x, the new x being declared is not in scope yet, and so the second x refers to the outside variable.

Because of the lexical scoping rules, local variables can be freely accessed by functions defined inside their scope. A local variable used by an inner function is called an upvalue, or external local variable, inside the inner function.

Notice that each execution of a local statement defines new local variables. Consider the following example: 

     a = {}
     local x = 20
     for i=1,10 do
       local y = 0
       a[i] = function () y=y+1; return x+y end
     end

The loop creates ten closures (that is, ten instances of the anonymous function). Each of these closures uses a different y variable, while all of them share the same x.