Not sure about digitally but traditionally it is done with a view camera with a tilting lens board.
This is usually used to place the plane of focus to get more things in focus but if you use it the other way it will selectively focus things and give the toytown ffect.
David Burnett took some pictures in this style at last year's Olympics using his Speed Graphic camera.
Steve's explanation is excellent, and the name the process usually goes by is the 'tilt-shift effect' which makes a great Google search term. You'll find many tutorials on how to do it in post-processing without using a tlit-shift lens.
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