Originally Posted by Diophantos

You can read exactly how it is calculated here.

The calculation looks fairly complex, but the ideas behind it are pretty simple. The basic idea is a rigorously improved version of the dumb "efficiency" stat, which simply adds up pts, rebs, etc. and subtracts missed shots and turnovers. PER does a similar thing, but multiplies the stats by coefficients based on their importance (the coefficients, I believe, come from Hollinger's regression analyses). It then adjusts for minutes played, pace, and era.