This has been discussed in forums before, and the consensus seems to be that Pal does 'understand' on a level that suits the story. It's just a narrative device to help kids watching the show feel a deeper connection to their pets, making them believe that their own pets could understand them. It's kind of sweet if you think about it.

As someone who's worked in animation before, anthropomorphism is a storytelling device used to create a more engaging and relatable experience for the audience. Pal understanding Arthur and other human characters is part of that. It's subtle but intentional, allowing for a deeper narrative without needing Pal to actually 'speak'. The animators and writers are skilled at giving him expressive reactions that convey comprehension.

Omg yessss, Pal totally knows what's going on! It's like DW's sassy comments, Pal's reactions are golden. 😂

Pal is clearly the mastermind behind every episode. Arthur is just the puppet, wake up sheeple!

Eh, I think you're reading too much into it. It's a kids show, the dog is just being a dog. Yeah, Pal has some funny reactions but that's the extent of it.

He def understands him, no question. It's like, sometimes my dog looks at me and I swear he gets it, whatever 'it' is. Pal is just that on TV.

Actually, there's a bit of a consensus in the community that some animals in the show display higher levels of cognitive abilities. It's not just Pal. Remember the Brain's pet frog? There are several instances where the animals seem quasi-sapient. 'Arthur's Pet Business' merely exemplifies this recurring theme. Their behaviors are more for comedic effect, playing on the typical trope of the 'knowing' pet sidekick in many children's shows.

lol yeah Pal is like a silent genius, it cracks me up how he always knows what's up. I think the writers do it on purpose for sure, to add some humor for us.