NEF mode uses a much larger file format (RAW), similar to a negative in film photography, that is a lossless file format, meaning the data does not get compressed, so none of the information is lost. The RAW format preserves slight changes in color that may be discarded when a JPG file is compressed.

On the Other: Limited Benefits

If you get the camera settings right and are not printing large photos, the differences in quality between NEF and JPG will be minute, if they are even noticeable at all. Also, the RAW files that are used when shooting in NEF mode are much larger than JPGs, so the amount you will be able to hold on your memory card or shoot in a burst is lower.

Bottom Line

NEF mode offers additional creative control for photographers after the photo has been taken because none of the original information is lost. If you need to be able to capture every detail perfectly or are planning to significantly crop your photos, shooting in NEF mode can give you that extra capability to make your shot just right. However, if you are shooting hundreds of pictures or are planning to display your photos on a computer or print 4-inch by 6-inch prints, JPG may be your best option.

Source:

Ken Rockwell: Nikon D200 File Formats

Cabridge in Colour: The RAW File Format

Scan Tips: JPG Image File Format