You can measure horsepower with a device called a dynomometer - not the sort of thing you're likely to have lying around! Litres refers to the size (volume) of the engine's cylinders. For example a 2 litre, 4 cylinder engine will have four 500 cubic centimetre (ie half a litre) cylinders.
Re. the litres-it's only the "swept volume" of the pistons in the cylinders ie. the space between the pistons' highest and lowest points. Thus increasing the height of the cylinders on its own doesn't increase the engine "size"- you have to either increase the amount by which the pistons go up and down (the stroke) or the diameter of the pistons/cyclinders.