In computing terms, an engine is something that is continually producing output based on input. But in Ruby, the term seems a little bit loose. The people who've created Refinery CMS have taken to calling gems that extend the functionality of their system, 'engines'.
Basically, what I want to know is, is Spree, the open source ecommerce cms written in ruby, an engine? Would calling it the 'spree engine' be correct?
As defined by Rails, an Engine is a lot like an application within an application. Spree is one of these, and there are others. Each engine has its own app folder with the same sort of structure you'd see in a top-level application.
You can combine one or more engines together into an application, then add your own functionality on top. That's what makes systems like Spree far more flexible than a fixed-puropose Rails app that you have limited control over.
Things that extend Rails are only truly engines if they are self-contained applications. Many gems add functionality that's much more specific than that, so are better termed "plug-ins" or "modules" depending on the phrasing.
It's actually pretty easy to build your own engine and can be useful for separating and re-using code across several different applications.