Final answer:
The Capital account is part of the Balance of Payments which tracks a country's international financial transactions including cross-border investments in assets like stocks and real estate. It differs from the current account by focusing on the flow of capital rather than trade in goods and services or income from investments. So, the correct answer is option 1.
Step-by-step explanation:
The Capital account is a sub-account under the Balance of Payments (BOP) which records financial transactions between a country and the rest of the world. These transactions include the purchase or sale of assets such as stocks, bonds, real estate, and businesses as well as loans borrowed or lent internationally. The Capital account, along with the current account and the financial account, helps paint a comprehensive picture of a nation's economic relations with other countries.
The current account includes the balance of trade in goods and services, international flows of income, and unilateral transfers, but it is the Capital account that reflects cross-border investments. If a country's residents are buying more foreign assets than foreigners are buying of its assets, the Capital account will record a net outflow of financial capital. Conversely, a net inflow is recorded when the reverse happens.
The Capital account is distinct from the current account, which records trade in goods and services and income from foreign investments, but both are interconnected since they reflect the overall supply and demand for a country's currency, which ultimately affects a nation's exchange rate and economic stability.
So, the correct answer is option 1.