Firstly, for those who do not know how to block someone in Gchat. This is what you need to do.
When you block a person this is what happens. When you login to Gmail Chat again - both of you will not appear in each other's friends list or rather will not appear online.Their name might still appear in a grayed out icon.
This will however not affect any emailing capabilities. You can still communicate via email but cannot chat and you do not appear in their friends list.
So if you used to chat often this is one way for the other person to know they have been blocked. Since they can't find you anymore - they will eventually figure out that they have been blocked.