Yes, exactly. It's normal for children to become curious, at some stage, about the opposite sex and dress like them and say they want to be a boy/girl, but it's a phase. As you said, they move on.
These parents are screwing up their kids' minds by allowing and condoning such behavior.
A young kid is confused from the get-go, if you - as a parent - start telling him I don't know, son, I guess you might be a girl, you're only going to confuse him.