It is a bit confusing to understand the difference in State API and Config API in Drupal 8. I went through the documentation of both on drupal.org but it is not clear to me yet.

Do we define both State config and Config variables in config/install directory? And How are they both distinguished?

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    State is environment-specific - the stuff you don't push around your environments. For example the last time cron ran is specific to an environment - that's state. The list of entity types available to a site is global to all instances of that site, and so is regarded as config – Clive Sep 25 '18 at 7:53
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    Clive covered it all really, but to directly answer your question, no you don't add both State and Config to the config/install directory. There are no .yml files for State values (as state is never meant to be moved between environments). Only config files go into config/install. – Jaypan Sep 26 '18 at 8:24

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