In this counseling answer:
“She is learning what the difference is between being a boy and being a girl. At this age, the only difference is anatomy. And anatomy is all she has to go by. The “way she is thinking” is pure. Clean up your own mind, so that you can assist her and answer her questions without making her feel shame for her innocence.”
Your niece is not interested in “such issues” as you might be imagining; adults sometimes inadvertently project their own imaginations onto the child. In fact, your child is curious. Don’t sexualize this.
Children at this age have many interesting parts to discover, and every child goes through his phase of discovery. Simply tell her what her body parts are. She is probably wondering why your breasts are big and look different than hers, if you are both girls. She is getting a picture of what she will grow into one day.
She is a little girl, female; you are a woman and female. This means that one day, she will become a woman. This is what she is learning. This is identity formation, and identity formation begins at the physical level. This is the age where identity formation develops and sexuality is part of one’s identity.
She is learning what the difference is between being a boy and being a girl. At this age, the only difference is anatomy. And anatomy is all she has to go by. The “way she is thinking” is pure. Clean up your own mind, so that you can assist her and answer her questions without making her feel shame for her innocence.
Wanting to know why you have one set of genitals when there is another set with another set of genitals does not mean you are thinking about sex. It means you are trying to figure out what you are. If your Mommy is a girl and you have what Mommy and Auntie have, then you are a girl; Daddy is a boy, and my brother is a boy…. Now do you understand? This is a normal stage.
You can buy books that are made for children to help them understand these things and this will help you feel more comfortable explaining them to her. Healthy sexual identity formation is very important at this age. Please do not make her feel ashamed. If you make her feel shame at this young age, it will affect her ability to have a good sense of herself as a woman when she grows up.
So please, this is normal and her interest in things that help her understand herself better is very normal, and necessary to her healthy development. I pray this eases your mind and frees you up to be a friend and teacher and example for your niece.
Disclaimer: The conceptualization and recommendations stated in this response are very general and purely based on the limited information that was provided in the question. You are strongly advised to seek face-to-face counseling and consult your physician or therapist when making a drastic change in your lifestyle in terms of behavior, medication or diet etc.