Continuity mistake: Just after Dorothy takes the cruller and before singing "Over the Rainbow", as she walks along the side of the building and Aunt Em says the words, "Help us out today," notice the wagon wheel leaning against the corner of the structure. Also notice that the fence just beyond the wheel has a broken top rail. Two shots later, a paddle appears and is now leaning against the wheel, and the fence is repaired. (00:05:15)
Continuity mistake: Prior to the Tin Man's dance after he's saved by Dorothy and the Scarecrow, there is a shot of Dorothy with the Scarecrow and the Scarecrow is holding the oil can. The camera turns to the dancing Tin Man and when it turns back to Dorothy and the Scarecrow, the oil can has somehow ended up in Dorothy's hand basket.
Continuity mistake: During most of the movie, all the characters have at least three shadows, and when the guy that guards the entrance to the Wizard first goes in to speak with him, he has at least 4 or 5.
Continuity mistake: During the Tin Man dance, Toto switches from one side of the Tin Man to the other side without walking there.
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.
Revealing mistake: When Dorothy bumps into the Tin Man, she knocks on his foot, which sounds metallic. However, her fist sinks, revealing it is made of a soft material.
Visible crew/equipment: When the gang runs into the guard at the door, they all walk to the right of the screen to talk to him. While they're walking, you can see the shadow of the boom mic following them.
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)
Revealing mistake: The moment before the Wicked Witch picks up the red hourglass to throw at Dorothy n friends, the flying monkey next to her is suddenly a miniature or reduced in size.
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.
Other mistake: When the witch approaches Dorothy and Glinda, her legs are white, not green.
Continuity mistake: Dorothy's giant lollipop disappears after the witch appears.
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.