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1.''What do you understand the meaning of better life?"

2"What do you understand by the meaning of better life?"

I want to know whether these two questions are different in meaning.

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The second sentence is correct and can be shorten to:

What do you understand by 'better life'.

Another example:

I understand by God's being eternal that he always has existed and always will exist.

Some words needs a preposition (by, to, of, from ...) to take an argument and if you omit that preposition the sentence become ungrammatical. Specially, if they take more than one argument:

You say:

The Police requested a grant from the government.

You can't say:

*The Police requested a grant the government.

Understand takes a direct object without any preposition like:

I can understand the lesson.

I understand that the God always has existed and always will exist.

In your sentence "what" plays this role and "What do you understand" is a complete sentence, but for its other argument it needs "by" preposition

What do you understand by 'democracy'.

I understand by 'democracy' that everyone has the right to to take part in the government of his country,

I understand that everyone has the right to to take part in the government of his country.

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