During the quantity production of small size photoelectric encoders, not only the encoder dynamic error must be detected in factory inspection, the error of non-standard encoder must also be traced and corrected. In the process of the dynamic error detection of photoelectric encoder in high speed and low speed, the reason caused excessive dynamic error of photoelectric encoder must be quickly found out, so that the encoder can be adjusted according to the reason of excessive error. The measurement and estimation system for dynamic errors of photoelectric encoder was designed by proposing a measurement and estimation method. Firstly, by the analysis on dynamic error of photoelectric encoder, the theory of dynamic error component was proposed. Secondly, the estimation method of dynamic error based on AR model spectrum estimation was proposed, and error criterions were proposed by error estimation. Thirdly, the measurement and estimation system for dynamic errors of photoelectric encoder was designed, error detection and estimation were achieved by this system. The speed range of this system is 0.5-8 r/s, measurement precision is 2″; the system can clearly display the mean square of errors in every frequency, this result can offer evidence for producer to reduce the error of encoder. The system was exact and reliable, and provides straight forward and effective measurement method for producer.