[Briareos]

As to where Last Exile is taking place...

This spoiler is revealed at the end of the series if you are paying enough attention to gather the clues scattered throughout the series. I would finish watching LE before reading this.

Spoiler:

It's not earth. The world is called "Prestair" or Prestar" and it's more like a space-bound constructed colony (i.e. the Plant colonies in Gundam Seed). You'll see it from space (via Exile) at the end of the series. The hour-glass shaped drawings that show up at various points in the series are either maps of the Grand Stream, or drawings of Prestair. Anatare and Deusis seem to be located at opposing ends of the hour-glass shaped colony.

If you're wondering why it looks like there is nothing above the nations but sky: In the beginning of episode one the Sylvana exits the grand stream. When it does so, it passes into blue sky through some sort of field. This "field" seems to not only hide the grand stream from view; it also perpetuates the illusion of a blue sky and seems to seal off each end of Prestair from the effects of the Grand Stream.

Exile doesn't so much create the world as it does help to maintain it. It's a colony ship -- I suspect it was one of many -- that was used to transport people from the home world (the blue planet, probably earth) to Prestair. This last remaining Exile apparently contains the technology to repair and maintain the colony. Even the guild seems to have lost the ability to maintain Prestair over the years, if it was indeed their job initially.

I feel that it was originally the Guild's job to transport people to Prestair, and that the people of Anatare and Deusis just settled on either side of the "hour-glass". As time went on, the Guild seemingly took advantage of the fact that everyone was dependant on their knowledge -- that is if they weren't doing so all along. As the generations went by, people forgot where they even came from and a great deal of technology was lost by the Guild through lack of use and lack of necessity.