Either is reasonable.
I personally follow this pattern:
1 - make the blog the actual site where practical.
2 - if the blog is related to a main website topically, I place it in a folder off the root - www.domain.com/blog/
3 - if expanding on somewhat related topics to the main website, I might consider a subdomain, but you need to tread carefully here - this option has been beaten to death by spammers, so ask yourself this:
Is this space we're trying to set up really it's own website. if yes, go for it. (subdomain)
Ultimately my decisions are based on experience and my personal long term goals for a project. of 9 or so sites I have running or had running, none were ever subdomained. A couple could have been, but I chose to start a new site on it's own domain each time.
HTH
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