Family relationships must be a difficult concept to work out in the mind of a child. I am, at the same time, a mother, a daughter, a wife, an aunt, a niece, and a granddaughter. The boys' grandmother is my mother. Their aunt is my sister. Their cousin is my nephew. I can see how it can get tought.
Here is how Colin and Caleb see things.
Today Colin said "When I grow up and my wife has a son, I think we will buy a trailer." It was so grown-up of him to use the word "wife" and "son," and you don't often hear that from a child. Usually kids use words their hear in relation to themselves, as is evidenced by Caleb's idea of the family. Caleb often says both "When you were a boy, Mommy...." and "When I grow up to be a Mommy..." I think I tried correcting him the first time, but it's harmless, and so darn cute, so I just let it go. He'll figure it out.