An interesting technique used in Oblivion is procedural generation. What that means is that instead of storing a model of every different tree, rock and flower, it stores an algorithm to generate a model of a particular object. The two major benefits of this are an unreal saving in drive space (A demoscene team developed a full 3D level of an FPS in 96KB. The same game would normally have taken 200-300MB of disk space.), and that the algorithms can be developed to generate object with some randomness. That means that you aren't seeing the same three trees everywhere you go, adding realism. Procedural generation is also the reason that wandering outside in Oblivion is quite hard or your CPU and GPU.

To put it simply and to paraphrase others, in a game, the characters, landscapes, objects and physics are all simulated rather than played back as a series of still images. Mathematical formulae determine how two objects will interact and events occur and are handled by the game engine, as a result.

[q=Gilghamut]I might be wrong on this, but I think Elder Scrolls: Arena or something, I've heard allows you to go into more than one country, though I am not sure on that. I'm not sure what number it is in the series.[/q]

Arena is a ridiculously enormous game. The reason for that is that all of the terrain and cities/towns are procedurally generated. Since disk space was a huge factor back then, this meant they would be able to include a huge world at low cost. As far as countries go, I don't know. I didn't play long enough.