it uses an equation to determine hp, it takes load, and torque readings, puts them into an equation and it makes an estimate. you have to know a baseline hp number by getting your car dynoed, then enter the hp into the gauge. after that, and you make changes to your car, the gauge will tell you if you make more power or less power based on the equation and the baseline hp that you input in the the gauge. I dont know everything about it but I do know that unless you have had your car dynoed and know a 100% accurate HP rating then the gauge can make more accurate estimates after that. until then, the gauge is making estimates using the data that was entered for a factory gt500.