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This qualitative multiple-case study investigates how Chinese EFL pre-service teachers (PSTs) conceptualize AI literacy within a university-based instructional methods course integrating generative AI (GenAI) tools. Guided by Ng et al.’s (2021) four-dimensional framework—Know & Understand, Use & Apply, Evaluate & Create, and AI Ethics—the study draws on reflections, interviews, and AI-generated artifacts from ten PSTs. Findings reveal that PSTs developed a context-sensitive, evolving understanding of AI literacy, characterized by strategic prompting, pedagogical adaptation, critical evaluation, and ethical deliberation. Rather than treating GenAI as a replacement, PSTs positioned it as a scaffold for professional learning. This study contributes theoretical clarity to AI literacy discourse and offers implications for designing responsive, ethically grounded teacher education programs that prepare future educators for AI-mediated teaching environments.