Why does the iPhone cost $599? The iPod touch, with similar components, costs $199. Are the phone chips that expensive, or are there licensing fees, additional regulatory requirements, etc?
More specifically, they can get people to sign up for $XX/month plans, which means Apple can get AT&T to pay them $399 for the hardware. There's no such deal to be made for the touch, thus it's $199.
As for the components, I'd be surprised if an iPhone off of the line in China would cost much more than $50.
apple can get people to pay over $1000 for an iphone. those phones that are sold unlocked in other countries that aren't subsidized go for well over $599 on ebay:
http://shop.ebay.com/i.html?_nkw=factory+unlocked+iphone+3gs...