The ever more realistic graphics in game consoles and PC's are based on approximations. Over the years, graphics card makers have improved the approximations, but there are still lot's of short-cuts.
Ray tracing, on the other hand, is the way to accurately render computer graphics. The process "traces" simulated rays of light as the bounce around a scene. Unfortunately, ray tracing uses so much CPU that it's only used for still-frames, or else as the final phase of movie making. An individual image (or frame in a film) takes from several seconds up to several minutes to render.
Caustic Graphics recently announced they plan to ship specialized hardware in mid 2010 that can ray trace scenes 200 times faster then the best current solutions. If they actually deliver on their promises, and it's not too expensive, this could lead to real-time ray traced graphics on game consoles and PCs equipped with their hardware.