Background: After the acquisition of basic grammatical skills, narrative competence gradually develops in preschool and primary school age, including the subsequent elaboration of syntactic complexity and the use cohesive elements. In addition, the adequate use of lexical means is an important component of story-telling. Previous research has shown children with language impairment have substantial difficulty when telling stories. Their deficits affect both the microstructural and the macrostructural level. Since lexical competence is relevant for narrative competence and lexical problems are often part of language impairment, the present study investigates the quantity, diversity, and composition of the lexicon in oral narratives. Method: The first, cross-sectional study includes 100 monolingual, typically developing (TD), German-speaking children at age 3;0-6;0. The children narrated three picture stories. The number of types, tokens, types-token ratio, mean length of utterance (MLU) and lexical composition were analysed. Results demonstrate that vocabulary size, as well as lexical composition, did not change over time, while lexical diversity and MLU increased with age. In study 2, a comparison of 34 children with language impairment (LI) and 34 age-matched TD children from study 1 shows a limited lexical diversity and a significantly lower MLU for children with LI. Children with LI used more nouns and more personal-social words, but fewer pronouns. Discussion: Vocabulary size and the use of word categories in children with LI are broadly similar to that of TD children. However, oral narratives of children with LI are characterized by a limited lexical diversity and shorter utterances. In addition, subtle differences with respect to the use of word categories were found, which are more typical for earlier phases of language development.