What is a Book Dummy?

A book dummy is when you take your story and make a "picture-book" out of it, with the text where you envision it to go.

If You are an Illustrator...
    Sometimes editors ask for dummies from illustrators, just to get an idea of their artwork across a storyline. After all, it's a lot easier to make one really cute character in one scene than to make a bunch of scenes with that character in different situations.
IF You are a Writer... 

   From writers, though, editors do NOT want to see dummies. If you are a writer, sending in a dummy shows that you haven't done your homework, and it's sure to get rejected. (Well, never say never, but why give them a reason to say no before they've even read it?) That's actually a good thing for you, because it saves a boatload of paper.

   Even though you shouldn't send a book dummy in, it is good practice to make a book dummy for yourself. Remember that books are generally 32 pages  (because the printer prints 8 pages to a sheet), with 28 of those pages reserved for the story. Try making a dummy, then rearranging the pages. You might find a better story, or you might get a good laugh (which is just as good in my opinion).
    So what do you do with all those book dummies, if you're not submitting them? I use mine to teach my kids to read. I mean, How cool is it that your kids are learning to read on your own (unpublished) picture books?
One More Note: Since I wrote this, my friend pointed out something I didn't mention. Picture books today tend to have more illustrations spanning two pages, so when you're making those dummies, it is a good idea to think in terms of 14 page spans rather than 28 single pages.