Continuity mistake: During the tornado scene while she's in her bedroom, there is a small oval picture (which looks like Elvira Gulch) over the bed which ends up sideways. As she gets up to leave after the house lands, it's straight up. (00:19:15)
Continuity mistake: There are two actresses playing Dorothy (and two dogs playing Toto) as she opens the door to Oz. The first is a stand-in wearing a dull colored dress in order to make it look black and white. After she opens the door and moves out of the way, Judy Garland is who we actually see walking through. Look at the different pleats on the two dresses. (00:19:25)
Continuity mistake: Not only does Dorothy's hair change length during the film, it also changes shade. (00:19:40 - 00:22:15)
Continuity mistake: The bows in Dorothy's hair are tied differently throughout the scene with Glinda the witch in Munchkinland. (00:19:40 - 00:21:30)
Continuity mistake: When Dorothy first walks around Munchkinland, the bright ruby slippers are seen sticking out under the right window of the house. Later when the Munchkins come out we see the same spot again and the slippers aren't there. (00:20:40 - 00:23:15)
Continuity mistake: Dorothy walks around Munchkinland and the large lily pads in the pond change positions between shots several times. (00:20:40)
Continuity mistake: As she holds Toto in her left hand, Dorothy looks around Munchkinland and says, "We must be over the rainbow". In the next shot she's holding him in both hands. (00:21:00)
Continuity mistake: As Glinda's bubble appears Dorothy walks off camera but we still see her standing there as her shadow is on the yellow brick road. When we first see Glinda Dorothy's shadow just disappears. (00:21:30)
Continuity mistake: When the Munchkins start coming out to see Dorothy, one Munchkin comes out of a manhole. But in other wide shots, and when Dorothy leaves to go to Oz, the manhole has totally disappeared. (00:22:25)
Continuity mistake: When Glinda starts singing, "Come out, Come out" she's not on the Yellow Brick Road. In the next shot she is. (00:22:55)
Continuity mistake: The blue shirted Lollipop Guilder comes from around the fallen house at the beginning of "Come Out Come Out," but he immediately appears emerging from a jet black manhole (with a black lip where the cover goes) in middle of the yellow brick in front of the house. (00:23:15)
Continuity mistake: When Glinda sings, "And Kansas she says is the name of her star" you can see the black manhole cover behind her and none of the Munchkins that are around it in the next shot are there. (00:23:15)
Continuity mistake: We see a Munchkin in a blue shirt climbing out of a manhole in the middle of the Yellow Brick Road and he has a prominent red scarf on. The wardrobe Continuity Person goofs because whenever we see him again, as in a glimpse in the very next shot and when Dorothy leaves Munchkin Land, the red scarf is gone. (00:23:20 - 00:33:25)
Continuity mistake: When Glinda says, "Let the joyous news be spread" the bridge and pond are behind her. In the next shot she's turned around almost facing the pond. (00:23:40)
Continuity mistake: When Dorothy starts singing, "It really was no miracle " we see two Munchkins on the bridge. One in a red and white bonnet and the other has a distinctive blue hat. In the previous shot they are together on the other side of the stage on Dorothy's left. (00:23:40)
Continuity mistake: When the mayor of the Munchkin City comes out of the doorway his over sized watch reads 5:30. In the next shot it reads 5:00. (00:25:40)
Continuity mistake: The mayor of the Munchkin city stands alone on the steps and proclaims, "Let the news be spread " In the next shot Toto suddenly stands at his left. (00:26:55)
Continuity mistake: The three Munchkins that represent the lollipop guild come out and start to dance. In the wide shot of them, they're standing apart from each other, but in the next closeup, they're standing right by each other. (00:27:00)
Continuity mistake: When singing 'Ding Dong the Witch is Dead', in a wide shot, many Munchkins run up to Dorothy, in a big crowd right beside her. But in the next wide shot when the mayor is saying 'From now on you'll be history' the crowd has gone. (00:27:20)
Continuity mistake: The blue Lollipop Guilder scoots up to Dorothy with his hands in his pockets. In the next shot his thumbs are sticking out. (00:28:05)
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.