How can I tell whether my child understands what a "friend" is?

Understanding of "friend" develops in stages. Early on, a friend is "whoever I'm playing with now" or "whoever is nearby"; later it grows into taking turns, caring about others' feelings, and being glad to meet again. Rather than whether they can explain it in words, look at behavior: (1) seeking out particular people, (2) showing pleasure at reunion, (3) sharing or waiting for a turn, (4) noticing how the other person is doing. If these appear, your child is building relationships in their own way. If it's still difficult, start by building secure back-and-forth with adults as the foundation.