bundle install returns "Could not locate Gemfile"

I'm new to Rails and am currently working through a guide. The guide states:

Use a text editor to update the Gemfile needed by Bundler with the contents of Listing 2.1.

source 'https://rubygems.org'

gem 'rails', '3.2.3'

group :development do
  gem 'sqlite3', '1.3.5'
end


# Gems used only for assets and not required
# in production environments by default.

group :assets do
  gem 'sass-rails',   '3.2.4'
  gem 'coffee-rails', '3.2.2'
  gem 'uglifier', '1.2.3'
end

gem 'jquery-rails', '2.0.0'

group :production do
  gem 'pg', '0.12.2'
end

We then install and include the gems using the bundle install command:

    $ bundle install --without production 

If Bundler complains about no such file to load -- readline (LoadError) try adding gem ’rb-readline’ to your Gemfile.)

I followed the steps even adding on gem 'rb-readline' to the Gemfile, but apparently the file can't be found and when I go to my text editor I do see the Gemfile itself. I noticed that they made me put gem 'rails', 3.2.3 and my version of Rails is 3.2.1 so I tried changing it to 3.2.1 but that didn't work either.

Any thoughts or advice would be much appreciated.

You just need to change directories to your app, THEN run bundle install :)