Revealing mistake: Whenever Dorothy, the Scarecrow, the Tin Man, and the Lion go off into the horizon you can see the line on the floor of the sound stage where the fake horizon is and the scene cuts off right as the four get to that point. (00:57:35)
Continuity mistake: When Dorothy first enters Munchkinland she steps out and in a front view we see her holding her hands close to herself, but when we look from behind, her hand is way out to the side. (00:18:50)
Visible crew/equipment: Near the very beginning, when Dorothy is with Prof. Marvel, after she runs out of his trailer and the wind starts blowing, he follows her and goes towards his horse tied up outside. As he's walking towards the horse, you can see the shadow of a boom mic along his trailer. (00:14:55)
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: Dorothy is standing against a tree stump when the Wicked Witch throws the fire down at them. In the next shot she's nowhere near the stump. (00:46:20)
Continuity mistake: When Dorothy walks on the pig sty Zeke walks to his right, looks into, than passes the bucket on the right because it's empty. He then picks up the bucket behind it on the bench and proceeds to feed the pigs. He empties the first bucket then picks up the second empty bucket, which is now three quarters full. (00:03:55)
Continuity mistake: Throughout the film, if you look at the Wicked Witch's nose, you can see that in some scenes the prosthetic nose is barely longer than Margaret Hamilton's real nose. In other scenes, the tip of her fake nose hooks almost all the way down to her mouth.
Revealing mistake: As they exit the Tin Man's scene singing, "We're off to see the Wizard", a bird stretching its wings is casting a shadow on the painted sound stage wall slightly to the right of the house, which reveals it to be a fake backdrop instead of an open area. (00:47:45)
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: Just before the Wicked Witch leaves Munchkinland she says to Dorothy, "just try to stay out of my way" and her broomstick is facing upwards. In the next shot it's facing downwards. (00:30:35)
Revealing mistake: In the scene where the Lion sings his "If I Were King" song just before visiting the Wizard, if you watch closely above his moving tail, there is a string holding up and moving around the Lion's tail. (01:04:15)
Continuity mistake: Glinda tells Dorothy, "Their magic must be very powerfulÂ…" and Dorothy has her left hand around Toto. In the next shot she's holding the flowers in front of her. (00:30:20)
Continuity mistake: Inside the cyclone, looking out the window the wind is blowing left to right. In the room the wind is blowing in the window from the right. (00:18:05)
Visible crew/equipment: As Professor Marvel stands at the window looking at Dorothy and his fingers are curled under the sash. If you look closely they are lit up from underneath, but there's no light on their floor. (01:40:30)
Continuity mistake: Prof. Marvel reaches to open the door of his wagon as he walks Dorothy in. In the next shot the door is already open. (00:12:45)
Continuity mistake: After they first meet him when Dorothy pulls the Tin Man's arm down we see her dress and there's nothing on it. In the next shot there are several wet spots on the front of it. (00:41:55)
Continuity mistake: The Cowardly Lion says, "I'll fight you with one paw tied behind my back, I'll fight you standing on one foot." as he proceeds to put his arm behind his back and lift up his left leg. In the next shot his arm is out in front of him and his leg is on the ground. (00:49:35)
Continuity mistake: Before he is crowned, the Cowardly Lion has a blue flower next to his left ear. In the next shot it's gone. (01:06:00)
Visible crew/equipment: When Dorothy lands in Oz and exits the house to Munchkinland, the camera pans around the land. When it slowly pans over a large bed of tall flowers, you can clearly see a very large shadow passing over them. Obviously the shadow of camera equipment or a camera crane. (00:19:10)
Revealing mistake: When Toto reveals the Wizard by pulling the curtain aside, he doesn't use his mouth; the curtain is tied to the dog. Dorothy can even be seen later removing the rope.
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.