This is actually a bit more complicated, but a simple explanation is that a 16-bit processor can perform operations with 16-bit numbers in one operation and deal with the large numbers that you need to split them. For example, to add two 32-bit numbers, you would add the least significant words in one operation, then add the most significant words, and then add any carry bits.
Obviously, this is much slower (3 teams instead of one), but if necessary, almost any operation can be performed. This is the reason that processors with larger words may be faster; they can perform larger operations with a single command instead of several instructions. From the point of view of programmers, the compiler will usually take care of this; you will never do it manually unless you write the assembly.
In reality, however, many processors have dedicated hardware for performing mathematical operations, so calling a 32-bit or 64-bit processor has more to do with memory addressing and register size.
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