The phrase gets used loosely across the industry. Here's what actually separates a genuine piece from an imitation. Hand-knotted describes a specific construction: a weaver ties individual knots of wool or silk around the vertical warp threads of a loom, row by row, securing each row with a horizontal weft before beating it down and starting the next.
The alternatives, briefly
Hand-tufted rugs are made by punching yarn through a fabric backing with a tufting gun, then gluing a second backing over it to hold the loops in place. They are handmade in the sense that a person operated the gun. They are not knotted, they have a glue layer that will eventually fail, and they typically last ten to fifteen years rather than a hundred.
Machine-made rugs are woven on power looms from synthetic or blended fibre. They can be attractive and they are inexpensive, which is a legitimate reason to buy one. They are not an investment and should not be priced as such.
“You are not paying a premium for the words hand-knotted. You are paying for the year somebody spent tying it.”
How to tell, in thirty seconds
Turn the rug over. On a hand-knotted piece the pattern on the back is as clear as the pattern on the front, and you can see the individual knots as distinct points of colour. A hand-tufted rug shows a plain fabric backing that hides the construction entirely. A machine-made rug shows a uniform, mechanically regular grid, often with a visible glue line at the edges.
Check the fringe as well. On a hand-knotted rug the fringe is a continuation of the warp threads running through the body of the piece. On tufted and machine-made rugs it is usually sewn on afterwards, and can be pulled away.
Why the price follows
A nine-by-twelve rug at moderate density holds well over a million knots. At a realistic pace that is the better part of a year of skilled work for two weavers, on top of the wool, the dyeing, the washing and the finishing. The price is not a premium for the label. It is what that labour costs, and it is also why the rug is still worth something in fifty years.