Emulators like PCSX2 can read these compressed formats directly by creating a small index file.
There is typically no speed difference during gameplay once the emulator has indexed the compressed file. Step-by-Step: Playing God of War 2 on PC
A standard PS2 ISO is roughly 8GB because it was one of the few games to use a dual-layer DVD. "Highly compressed" versions—often found in formats like .GZ , .CHD , or .CSO —can reduce this size significantly, sometimes down to 60-70% of the original file, without losing gameplay quality.