1.6 liters refers to a cars engine?

Yes, it refers to the swept volume, of the cylinders in an engine. That is also the same as a 1600 cc engine.

It gives an idea of the size of the engine and the potential to do work.

In the USA the same method is used, but Cubic Inches are used instead of the metric system.

It is only a baseline idea of the power of an engine.

This can be hugely altered by strapping on turbo chargers, fuel injection systems and changing valve design and lift.