Continuity mistake: When the cyclone begins, two farmers run to protect the horses. One goes inside the stable and the other runs away. Half a second later he is standing next to the stable's door.
Continuity mistake: In the scene where the tornado is forcing everyone into the storm cellar, there is a bench lying on its side. In the next scene, when Dorothy arrives at the cellar, the bench is not only turned in an entirely different position and seems to have gotten bigger, but a wash tub has been placed in front of it.
Continuity mistake: Prior to the Wicked Witch attempting to retrieve the ruby slippers from her sister, Dorothy is seen standing in front of Glinda still holding the lollipop she was given. The camera then turns to the Wicked Witch of the West and when it turns back to Dorothy, the lollipop has disappeared.
Continuity mistake: When Dorothy, Scarecrow, and Tin Man start singing "Lions and tigers and bears. Oh my." they show a close up of Dorothy. She is facing her right in the close-up, but when they show all three, she is facing slightly to her left.
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: When Dorothy wakes up in Kansas, Prof. Marvel sneaks up in the window behind. Dorothy's pigtails change positions between shots.
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 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 Wizard is in the balloon, he raises his top hat pointing in an 11 o'clock direction. A frame later it's pointing in a 9 o'clock direction.
Continuity mistake: When the Witch turns the hourglass, the spoon in the mortar behind her moves around between shots.
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.
Continuity mistake: When the Witch flies off to Emerald City the monkey is standing by the window sill. The outside angle, where the window and rest of the set are a matte painting, has the Witch superimposed, but not the monkey.
Continuity mistake: When Dorothy and the Scarecrow find the Tin Man and oil his mouth, between shots, the leaves on the Tin Man's shoulders change.
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.
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.