Special effects come in a huge variety of forms. The term covers almost everything that is created to enhance a shot. Many of them are created on a set - fake explosions using compressed air for example or specific camera movements and angles to create a sense of movement and size.
Increasingly, effects are added electronically in the post production phase: Film directors often film the whole movie then add special effects later on a computer.
An example is the technique called chroma keying, also known as green screen or blue screen. Filming a subject in front of a blue or green background allows the subject to be superimposed onto backgrounds at a later time. This kind of technique allows an actor to appear in a place that would otherwise be impossible. If the director wants the actor to be in outer space, chroma keying lets it happen. Underwater or in the middle of a raging fire are just as easy. As computing power increases, so the complexity of the effects grow and become more lifelike.
Despite the growing use of computers, there are still a vast number of effects that are created on a set using very simple techniques by craftsmen who spend their working life making us believe that it's happening for real.
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