The terrain option shows 3D elevation of your current view. Elevation is limited to natural geographic features, like mountains and canyons, and does not apply to buildings. Turn this feature on to get an even clearer image of your favorite ski resort or canyon trail.
You can turn terrain on by selecting:
Windows/Linux: Tools > Options > 3D View. Under the Terrain Quality section, select the 'Show terrain' box.
Mac: Google Earth > Preferences > 3D View. Under the Terrain Quality section, select the 'Show terrain' box.
You can also adjust the appearance of the terrain if you would like the elevation to appear more pronounced in your views by modifying the 'Elevation Exaggeration value'. The default value is set to 1, but you can set it to any value from 1 to 3, including decimal points. A common setting is 1.5, which achieves an obvious yet natural elevation appearance.