I don't doubt Apple is working on a "cheaper" iPhone for "emerging markets" but I do find it hard to believe it will have a larger screen compared to the regular iPhone, assuming the "cheaper" iPhone is also going to be for sale in the US.
It just doesn't feel right that Apple (in the US) would make someone who wants to go with a larger screen buy a "cheaper" product to do so. I just don't buy Apple would want their customers to feel that way.
So this story is either completely BS (which I'm inclined to believe) or there's much more to it.
I don't buy $330 either. As we've seen from analysts price predictions on other Apple products, Apple will probably price it $50-100 more.