The kernel doesn't contain firmware, and most devices don't contain it to save money. So it's in most cases external.
Thank you, curaga. Good to know. When the firmware is free (as in freedom), is it contained in the kernel module then? Because in my experience, free software-friendly peripherals almost never require downloading any firmware.
I did a bit more research. Someone mentioned
here that the firmware for the RT5370 chipset is
rt2870.bin. So it seems that if I load wireless-KERNEL.tcz (which contains the driver, rt2800usb.ko.gz) and firmware-ralinkwifi.tcz (which contains the firmware, rt2870.bin) this thing should work. (It's frustrating how none of the numbers match--RT5370, rt2800usb, rt2870. Oh, well. It seems very few things in life are as simple as one would expect.) I'll order this thing and will add a reply once I've had a chance to test it out.
P.S. I much prefer Atheros chipsets because they do not require anything proprietary to work. However, USB wireless adapters with Atheros chipsets support only 7-8 clients when used in AP mode (I know this from years of living with this limitation). Supposedly, USB wireless adapters with the RT5370 chipset are able to handle 20+ clients in AP mode.