A dyno run is done completely through one gear, usually the gear closest to a 1:1 ratio. Without a perfect 1:1, the computer software will have to perform one more calculation to get your real number---not a big deal; it is simply preferred to rely less on a computer. The test computes how much torque, at the wheel, your car is producing. This, in turn, is converted to HP, since HP is just a function of torque. At that point, you have the hp and torque of your engine, measured at the wheels. Keep in mind that your car's driveline will absorb some of this power simply operating; this is referred to as parasitic loss. Basically this is just the power associated with spinning things like your flywheel, driveshaft, transmission, axle..etc. This is why a car will measure lower hp at the wheel than the engine is actually making. One last thing to remember--there are several different brands and types of dynos, but really only two categories--chassis and engine. A chassis dyno is what all of your friends are using and is the one I am discussing. It measures hp at the wheels. An engine dyno is what manufacturers and some tuners use to measure hp at the flywheel--this is done by testing an engine outside of the car, hooked up to no driveline.
Jon
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