In Rails, gems are libraries that add specific functionality to a Rails application. They can be used across different projects and typically do not have their own structure or generators. Examples include devise for authentication and nokogiri for XML parsing.

Engines, on the other hand, are miniature Rails applications that can have their own routes, controllers, models, and views. They are used to encapsulate and modularize specific features or components within a Rails app. An engine can be packaged as a gem, but it provides more extensive, self-contained functionality compared to a typical gem.

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