Continuity mistake: Dorothy sees Toto run off and cries, "He got away! He got away!" Her right arm is lowered, but in the next shot it's suddenly raised. (01:14:32)
Revealing mistake: As the Witch appears through a door and walks down a set of steps, right before she says "Well, ring-around the Rosie," her flesh-coloured legs are visible, not green coloured.
Revealing mistake: The Lollipop Guild's bald caps and face makeup to hide them, especially the ones on the sides, are very, very obvious.
Continuity mistake: When Dorothy wakes up, Toto jumps on the bed. She hugs him while he faces the left side, and she says, "Toto, we're home." A shot later, he is facing the right side.
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.