Continuity mistake: Dorothy raises her right arm and points at the horizon and cries, "There's Emerald City!", then lowers her arm. A shot later from the angle shot from behind, it's raised again and she's repeating all previous movements. (00:54:41)
Continuity mistake: When Toto escapes from the castle, jumping over the moat, Dorothy starts crying. A shot later, her right arm is leaning on the wall. (01:17:46)
Continuity mistake: When Dorothy wakes up in Kansas, Prof. Marvel sneaks up in the window behind. Dorothy's pigtails change positions between shots.
Continuity mistake: When Professor Marvel guesses why Dorothy is running away, she's holding her suitcase with the lid facing Marvel. But in Toto's closeup, as he snatches the hotdog from Marvel's long grill fork, the suitcase is turned the opposite way with its lid facing Dorothy. Then it changes back, so the suitcase lid faces Marvel again. (00:12:10)
Continuity mistake: After Zeke rescues Dorothy from the crowded pig pen, Hickory wipes his face and neck with the rag in his right hand, but then it cuts to another angle, and the rag is suddenly in his left hand. (00:04:20)
Continuity mistake: When Dorothy slaps Lion on the nose for chasing Toto and shouts, "Shame on you!" in the wide shot, we see Dorothy's right arm with no mark on her skin. It then cuts to the medium shots, and there's an inexplicable long, thin blue mark (it's not a loose thread) on Dorothy's arm near her elbow, while she's holding Toto. This blue mark vanishes in the wide shot when she puts Toto down, and Lion begins to sing. (00:50:25)
Continuity mistake: While Dorothy, Tin Man, and Scarecrow are walking in the dark and creepy forest, just as Dorothy begins to sing "Lions and Tigers and Bears" in the medium shot, Tin Man is holding up the axe in his left hand. But it cuts to the long shot, and the axe is in Tin Man's right hand between shots. (00:48:40)
Continuity mistake: During the tornado scene, Dorothy gets knocked out by the windows, but right before the house hits the ground, the windows are back and intact.
Continuity mistake: When the Wicked Witch leans down to see the ruby slippers sticking out from under the house, she is pointing down at them, and practically touches them. But in the subsequent shots, she is in her standing spot from prior, pointing between Dorothy and the house.
Continuity mistake: When the Tin Man tells Dorothy that he was chopping that tree, she starts to turn her head to look at the tree. But then in the jump cut closer, suddenly she's looking back at the Tin Man.
Continuity mistake: When the witch is making her way towards the house a shadow disappears and reappears.
Continuity mistake: Dorothy's giant lollipop disappears after the witch appears.
Continuity mistake: When Prof. Marvel holds the photograph, his fingers disappear in the close-up.
Continuity mistake: As the Professor is revealed behind the curtain, his right hand is busily working one of the silver levers. A second later, it's working one of the red levers above the big dial.
Continuity mistake: When the Tin Man is levitated and falls to the ground the metal covering his left leg is crumpled up. When we see him again from behind as the flying monkeys attack, the metal covering his leg has never been bent. The metal on his lower back has also been repaired since the fall. (01:14:05 - 01:15:05)
Continuity mistake: If you look at the cracks in the floor, the Wicked Witch's cape moves between shots after she is "melted". (01:26:45)
Continuity mistake: In the haunted forest when the Tin Man is levitated then dropped, the tin surrounding his upper left leg gets bent on impact. Later in the movie, the tin is perfectly formed and unbent.
Continuity mistake: When the Witch turns the hourglass, the spoon in the mortar behind her moves around between shots.
Continuity mistake: Toto runs away from the castle and Dorothy starts to cry. The angle changes and her left arm is now raised and she is also not crying as bitterly as in the previous frame.
Continuity mistake: Dorothy arrives at Prof. Marvel's cart and stands very close to the sign on the side. When the angle changes, she is standing several meters behind.
Answer: In the film it's left ambiguous. At the end it's strongly implied that she was dreaming. The characters she meets all look like people she actually knows. In the original book, she actually went to Oz.