Games create alternate worlds whose relationship to the real world can range from extreme realism to utter fantasy. As shown in Figure 1, the highest degree of verisimilitude appears in simulations, commonly known as “sims." By their very nature, these games attempt a close approximation of the outside world, while still maintaining various degrees of ludic elements. Sports simulations, for instance, might model the rules and tactics of a sport perfectly, while allowing the player to have teams from different decades play against each other. Military strategy games might almost obsessively strive for realism in terms of equipment and unit behavior, yet open up the possibility of counterfactual outcomes, such as the Confederacy winning the battle of Gettysburg. The highest degree of realism can be found in so-called "hardcore" military simulations, e.g., Jane's F/A-18 or Sub Command, which model military equipment in amazing detail (see Figure 2). 

In fact, during the making of the submarine simulation game 688(I) Hunter/Killer the development team was asked by the US Navy to leave out certain elements that came too close to classified realities.

Figure 1. Realism vs. fantasy in certain game genres.

Figure 2. A screenshot from Sub Command.

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On the other edge of the spectrum, we find fantasy and science fiction titles that create (rather than recreate) worlds of magic - in the sense of Arthur C. Clarke's well-known quote "Any sufficiently advanced technology is indistinguishable from magic."