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On Glee it is a recurring theme that the glee club is short on money. For example in 1x09 Wheels it is a plot point they do not even have the budget to pay for the special bus to take Artie to sectionals. On the other hand, the glee club is often shown performing in extravagant costumes and with elaborate stage decorations, even outside of public appearances.

Episode 6x10 The Rise and Fall of Sue Sylvester provides a possible in-universe explanation of this discrepancy when we see that the costumes and effects in Sue's and Will's performance of The Final Countdown exist merely in their imagination and they are actually performing in their regular clothes on an empty stage. Applying this "dream sequence" concept to most of the performances could explain many things that we see on Glee that don't make much sense when taken at face value - not only the expensive costumes that change each week, but also things like why it is possible for the students to break out into song during class and not have the teachers interrupt them.

But episode 5x13 New Directions established that at least the Roar performance on a jungle set in 5x04 A Katy or a Gaga was real, as witnessed by Sue mentioning:

I have here a line-item budget of the jungle set you constructed onstage a few weeks back so the Glee Club could perform a Katy Perry song literally for just you.

Thus the one cannot chalk all discrepancies between budget and visuals up to "dream squences" / us seeing what the characters only feel. Nevertheless I am wondering whether this is still the best in-universe way to reconcile the elaborate performances with the glee club's limited budget.

Are the performances on Glee largely showing the characters' imagination? And if so, is there a way to tell which performances are imagination?

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As a former Glee fan, I personally think that there is no point seeking logic from the plot whatsoever. Sometimes they dream, sometimes it's real, but often still not logical. Have you seen other production from Ryan Murphy (and his co-producers)? It's his style. He mixes the real life and surreal thoughts, dreams, whatever together and makes something beautiful.

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