PHP is the software on the webserver that runs Joomla. Usually php has the graphic library (GD) extension enabled. If you get this message, it means the graphic library extension is not enabled.
You can check if the graphic library is enabled by going to the Joomla System information page, and view the php info tab:
Now search for "GD". If the graphics lirary (GD) is enabled you will see this.
If the graphic library is not enabled, you will not find "GD" on the page.
If your webserver is a paid webserver, please ask your webserver admin to enable the PHP GD extension.
If you are using a localhost, then you need to edit your php.ini file, and enable the graphic library. If you use xampp as the localhost, please see this page.